Your simple guide to Traditional and Roth IRAs

Saving for your future and retirement, at any age, is always a good idea. By opening a retirement account, you can benefit from compounding interest by investing in stocks and bonds.

The most common retirement accounts are the 401k and IRA. While a 401k is commonly associated with your employer, an IRA is an individual retirement account that you can contribute to outside of your employer.

If you are looking for another way to invest towards retirement, an IRA may be the route to go. Here, you will learn the differences between a Roth and a Traditional IRA and how they can help you invest in your future.

What you’ll learn

• What is a Roth IRA?
• What is a Traditional IRA?
• What is the difference between a Roth IRA and a Traditional IRA?
• Withdrawal guidelines for a Roth IRA and a Traditional IRA
• Contribution limits and deadlines for funding your IRA
• Save more with an IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account that allows you to save for your future with after-tax dollars. Almost anyone can open a Roth IRA, but only those with earned income within the IRS's annual limits can contribute (see below for more information on these restrictions).

What is a Traditional IRA

On the other hand, a Traditional IRA is taxed after you withdraw money from the account. The tax rate for the funds withdrawn will be your current tax rate at that time.

What is the difference between a Roth IRA and a Traditional IRA?

The main difference between a Roth IRA and a Traditional IRA is how they are taxed. With a Roth IRA, you make your contributions post-tax, so they are not tax-deductible, and your earnings will grow tax-free (unless you withdraw before you are 59 ½ and have your account open for less than five years).

On the other hand, Traditional IRAs are taxed when you make a withdrawal, while your contributions may be tax-deductible.

Withdrawal guidelines for a Roth IRA and a Traditional IRA

Money in your Roth IRA or Traditional IRA can't be withdrawn from your account until you reach 59 ½ and have it for five years without potential taxes and fees. There are some exceptions, such as disaster, death or disability, to name a few.

Withdrawal guidelines if you are 59 ½ and under

For a Roth IRA

There are no penalties for withdrawing contributions to a Roth IRA at any age; however, there is a 10% federal penalty on earnings if you withdraw before age 59 ½.

For a Traditional IRA

All funds within your Traditional IRA are subject to a 10% penalty if you withdraw from it before age 59 ½ along with being taxed at your current tax rate.

Withdrawal guidelines if you are over 59 ½

For a Roth IRA

As long as your account has been open for five years, all withdrawals are tax- and penalty-free if you wait until you are 59 ½. There are no required minimum distributions (RMDs) on a Roth IRA.

For a Traditional IRA

While the 10% penalty is removed, you will still be taxed at whatever your current tax rate is at the time of withdrawal. Furthermore, traditional IRAs have RMDs starting at age 72 (73 if you reach age 72 after Dec. 31, 2022), forcing you to withdraw a portion of the account every year.

Contribution limits and deadlines for funding your IRA

The IRS limits how much you can contribute to your retirement accounts every year. For 2024, Traditional IRA contributions are limited to $7,000 for those under 50 and $8,000 for those over 50.

The amount you can contribute to a Roth IRA, if at all, is based on your annual modified adjusted gross income. For 2024, single filers need to make less than $146,000-$161,000, while those married and filing jointly must make less than $230,000-$240,000.

Even though there are only a few more months in 2024, you have until tax season to contribute or even start an IRA. So, to contribute to an IRA in 2024, you have until April 25, 2025.

Save more with an IRA

Traditional and a Roth IRA’s have distinct differences, but both are great ways to increase your retirement savings. However, what type of IRA works best for you is dependent on your goals, income level and lifestyle.

While the information provided is based on our understanding of current tax laws, and has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.