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 a traditional and a 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, your money grows 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.
Contribution Eligibility Age Limits
Another difference between the two types of IRAs is eligibility age. With a traditional IRA, anyone under age 70 1/2 with taxable compensation may contribute. With a Roth IRA, anyone at any age with taxable compensation may contribute.
Maximum Contribution Limits
Each type of account is subject to maximum contribution limits, and Roth IRA contributions have income limits as well. The following information is for tax year 2015. (Be sure to check the IRS website for current information.)
- Traditional—There is a $5,500 contribution limit for people under age 50 and a $6,500 limit for people age 50 or older. There are no income limits for contributions to traditional IRAs, however, there is no tax deduction for your contributions if your income exceeds government-set limits.
- Roth—There is a $5,500 contribution limit for people under age 50 and a $6,500 limit for people age 50 or older. In addition, there are income limits.
- Single filers: If your average gross income is less than $116,000 per year, you can contribute up to the maximum amount. If you make between $110,001 and $131,000 per year, you can contribute a prorated amount. If your annual income exceeds $131,000 you are considered above the Roth IRA income limits.
- Joint filers: If your average gross income is less than $183,000 per year, you can contribute up to the maximum amount. If you make between $183,001 and $193,000 per year, you can contribute a prorated amount. If your annual income exceeds $193,000 you are considered above the Roth IRA income limits.
Distributions from a traditional IRA are taxable. Qualified distributions from a Roth IRA are tax-free and penalty-free. You may incur early withdrawal penalties and/or additional taxes on withdrawals from both types of IRAs before age 59 1/2.
Required Minimum Distributions
With a traditional IRA, you must begin taking distributions at age 70 1/2. Distributions of a Roth IRA are not required.
Ally Bank Offers 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. Check with your tax advisor to help you make the best decision for your situation.
Learn more at Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559).
Ally Bank, member FDIC