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Can You Spot The Difference Between A Traditional IRA & A Roth IRA?

| August 03, 2020

By Kristi De Rycke, Registered Assistant

Can you also spot the differences between the Traditional IRA and a Roth IRA? Read on to see which option is best for you. There are four main differences between the two. 

  1. Taxes: If you contribute to a Traditional IRA, your income will be reduced dollar for dollar by that amount. If you make $50,000 and you put $5000 into a Traditional IRA, your income will look more like $45,000 to Uncle Sam when it comes to tax time. This money will then grow without paying any taxes on it until you withdraw it. At that time, you will be taxed on it as ordinary income. When you contribute to the Roth IRA, you contribute after you have paid taxes on the money. However, once you have been taxed on this money, it will grow tax deferred and you will not be taxed upon withdrawal.This means if you take $1000 out of it then you get $1000 free and clear. The Roth might be a better option for someone who will continue to be in a high tax bracket in retirement. If you are not sure of your anticipate future taxes, discuss this with your tax professional.
  2. Rules on Withdrawals:The rule for traditional IRAs are that you cannot withdraw money prior to age 59 ½ or you will pay a 10% penalty in addition to the taxes owed. The Roth IRA allows more flexibility in that you can withdraw before 59 ½ without having to pay the penalty in certain circumstances. These include medical expenses, health insurance if you have collected unemployment for 12 weeks, college costs, first time home purchase ($10,000 individual/ $20,000 per couple), disability, active duty over 179 days, or if your IRA is set up with regular payments in an annuity.
  3. Required Minimum Distributions: RMDs means that the government allowed you to not pay taxes on the money all that time. Once you reach the age of 72, they will calculate a certain amount each year that you are required to withdraw whether you need it or not. There is a calculation based on the sum of your traditional IRA and your age. You will have no required minimum distributions on the Roth IRA.
  4. Income Limits: There are no income limits to be able to contribute to a Traditional IRA. The 2020 income limits for the Roth are that you can contribute the $6000 ($7000 for over 50) if you are single and your modified adjusted gross income is less than $124,000. A partial contribution is allowed if your income is between $124,000 and $139,000. If you are married and filing jointly you can contribute the full amount if your income is less than $196,000. You can do a partial contribution if your joint income is between $196,000 but less than $206,000.

So, there you have it! These are the four main differences in a Traditional IRA and Roth IRA. The choice is yours. Still not sure which is better for you, give us a call. We can help walk you through it. 

A Roth IRA distribution is qualified if you've had the account for at least five years and you've reached age 59½. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty.

By Greg Johnson

This debate has been around for quite some time and will continue as long as investors have the ability to choose. I typically recommend funding the Roth IRA to complement any type of work retirement plan you have in place so that you have a bucket of taxable money from the employer plan and a bucket of tax-free money. Depending on your situation you may be better off investing in the pre-tax IRA as you can get more money working for you. It is very important to speak with a professional to help you determine which plan is best.

NOW JUST FOR FUN! Can you spot the differences between these two pictures? Hint: there are 15. Try it with your family, who may be experiencing more time together than normal these days. The answers are posted at the bottom of this blog.

Answer key: Hair Pin, Cabinet Door Knobs, Clock Time, Little People On Shelves, Smiley Face On Plate, Cat With Lolly Pop, Square Cookie, 1 Verse 2 Flowers, Grandma's Shirt, Number Of Bananas, Bottom Layer Of Cake, Girl's Socks, Girl's Mouth, Top Of Curtain, Green Picture