Traditional and Roth IRAs are both individual retirement accounts (IRAs) that can help you save and grow money for retirement. There are, however, key differences between the traditional and the Roth IRA. Understanding these differences can help you decide which account is best for your financial plan.
For many people, the key difference between a traditional and a Roth IRA is when you pay income taxes on the money in the accounts. With a traditional IRA, consider if you prefer your money to grow tax-deferred until you withdraw it in retirement. In many cases, your contributions are tax-deductible in the year they are made. With a Roth IRA, your contributions to the account are taxed, but you don't pay income tax when you withdraw money in retirement.
Another key difference is who is eligible to contribute to each account:
- Traditional - Anyone under age 70½ with taxable compensation.
- Roth - Anyone at any age with taxable compensation.
Maximum Contribution Limits
For tax year 2012, each type of account is subject to maximum contribution limits, and Roth IRA contributions have income limits as well:
- Traditional - $5,000 contribution limit for people under age 50; $6,000 limit for people age 50 or older. There are no income limits for holders of traditional IRAs.
- Roth - $5,000 contribution limit for people under age 50; $6,000 for people age 50 or older. In addition, there are income limits for 2011:
- Single filers: If your average gross income is less than $110,000 per year, you can contribute up to the maximum amount. If you make between $110,001 and $125,000 per year, you can contribute a prorated amount. If your annual income exceeds $125,000 you are considered above the Roth IRA income limits.
- Joint filers: If your average gross income is less than $173,000 per year, you can contribute up to the maximum amount. If you make between $173,001 and $183,000 per year, you can contribute a prorated amount. If your annual income exceeds $183,000 you are considered above the Roth IRA income limits.
- Traditional - In many cases, your contributions are tax-deductible in the year they are made.
- Roth - Roth IRA contributions are not tax-deductible.
- Traditional - Taxable. Could include a 10 percent early-withdrawal penalty if made before age 59½.
- Roth - Distribution of an original contribution is always tax- and penalty- free. Any earnings and conversion dollars from other retirement plans are tax-free after the IRS's five-year aging requirement has been met, but only if you're 59½ or older; otherwise, you could incur a 10 percent earl-withdrawal penalty.
Required Minimum Distributions
- Traditional - Mandatory at age 70½.
- Roth - Not mandatory.
Ally Bank IRA Options
At Ally Bank, we offer IRA products for both traditional and Roth IRA CDs. With an Ally Bank IRA CD or IRA Online Savings Account, you can safeguard your retirement savings with deposits that are FDIC-insured up to the maximum amount allowed by law. Plus, you can earn interest rates that are consistently among the most competitive in the country.
If you're interested in learning more about our IRA choices, visit AllyBank.com, or call a live customer care representative anytime, 24/7 at 877-247-ALLY (2559).