The Differences Between a Traditional IRA and a Roth IRA

Choosing the correct account for yourself and your family may seem complicated and confusing, but you only have a few options when it comes to how you wish to be taxed. Below we share a comparison between a Traditional IRA vs a Roth IRA.

Traditional vs. Roth

  • Traditional: You may potentially receive a write-off on your taxes for contributions, determined by your household income. The funds then grow tax-deferred by revenue and dividends generated from your investments. Upon retirement age (59.5) you can begin distributing funds from your Traditional IRA without penalty, but this income will be added to your gross household income, so you will have to pay taxes on these funds. You can, if you wish, wait to distribute any funds from your account until 70.5 years old. At that point, the IRS rules say you must begin taking Required Minimum Distributions or RMD’s. This is basically the government’s way of saying, you received a write-off when you put these funds into this account we need to make sure to get our taxes before you pass away. I know, somewhat morbid!
  • Roth: You do NOT receive a write-off on your taxes for contributions. The contributions you make to this account are “after-tax dollars.” However, you will get to grow your retirement money tax-free, forever! Like the Traditional IRA, the funds then grow by revenue and dividends generated from your investments. After age (59.5 and 5 years of the account being opened) you can take a distribution that is both penalty and tax-free. This tax-free distribution increases your NET household income. This is also an excellent choice for an estate planning tool, as you do not have to take any RMD’s, at any age. You have already paid your taxes. You are free to do what you wish with your distributions.

* High-income households: your financial advisor may tell you that you do not qualify for a Roth. There is something called a backdoor conversion that you can contribute to a Traditional and not receive a write-off, then convert the next day to a Roth. There is never a no iif this is the account type you want!

These are the primary differences between Traditional and Roth retirement accounts. There are some other rules that may or may not apply to you depending on your household income. Please speak to a Mountain West IRA representative if you wish to learn more.

Are you interested in learning more? Here is a no cost, no obligation webinar for you to check out: Alternative Asset Allocation Model

Roth IRA V.S. Traditional IRA

When making the choice to invest in an IRA, the decision can seem a bit daunting. You may be wondering what type of IRA would work best for your needs. Additionally, the terminology and volume of information may have become overwhelming.

Mountain West IRA offers multiple retirement savings options to our customers. It’s important to understand that SEP IRA and Simple IRAs as well as individual 401(k) plans all revolve around meeting business needs. If, however, you are attempting to meet your own retirement needs, regardless of your employer, the Roth IRA or Traditional IRA are two options available to you. Did you know that all of these different types of IRAs can be done in a self-directed IRA account?

To begin, let’s take a look at the similarities:

Maximum Contributions: The maximum contribution limit for both IRAs is $5,500 for 2014. The only exception is for those who are age 50 or older. These individuals may contribute an extra $1000 to their IRA as a catch up contribution.

Contribution Deadlines: Contributions to an IRA must be completed by April 15 to count for the prior year.

Here’s a comparison of the Roth IRA and the Traditional IRA:

 

Roth IRA

Traditional IRA

Tax Benefits:

Tax and penalty free growth, and qualified (conditions apply) withdrawals after 5 years

 

No tax breaks for contributions

Tax deferred growth

 

Tax deductions may apply in contribution years

 

Eligibility:

Any age

Earned Income

Income restrictions apply

Under 70.5

Earned Income

No income restrictions

Withdrawals:

Contributions are withdrawn tax-free

 

Earnings are withdrawn tax-free after 5 years and only when meeting certain conditions

Withdrawals of pre-taxed contributions and all earnings are taxed when withdrawn

Penalties:

Non-qualified withdrawals are penalized with income tax and a 10% tax

 

Exceptions apply

Withdrawals prior to 59.5 years of age are subject to a 10% early withdrawal tax

 

Exceptions apply

Minimum Distributions:

None

starting at the age of 70.5

Other Benefits:

After the 5 year holding period, up to $10,000 can be withdrawn (tax and penalty free) to cover first-time homebuyer expenses

Contributions lower your adjusted gross income providing tax benefits

 

Up to $10,000 may be withdrawn (penalty fee but still taxed) to cover first-time homebuyer expenses

 

Although these guidelines provide some great information you’ll want to consult your tax professional for the plan that best suits your individual needs. Regardless of which IRA you select, Mountain West IRA would be happy to help you open your self-directed IRA account. With your self-directed IRA you’ll be able to take advantage of a host of different IRA investment options to assist you in your quest for a happy and comfortable retirement. Please contact Mountain West IRA today to discuss the possibilities.