When it comes to deciding between a traditional IRA and a Roth IRA there is no one right answer that applies to everyone. The decision comes down to a review of each person’s individual situation, needs and personal goals. To help you decide, I wanted to compare the key differences between these two options.

Three differences between an IRA and Roth IRA

1. Taxes

Perhaps the most fundamental differences between these two types of retirement accounts is related to taxes. Do you want to pay your taxes now or later? Contributions to a traditional IRA are generally tax deductible. However the amount of the deduction is subject to phase-out’s above certain income limits which we will discuss later. Money in these accounts grows tax deferred until you begin to make withdrawals at which time the amount withdrawn is taxable income. With a Roth you get no current tax benefit for making the contribution, however the money grows tax free and there will be no taxes due when making withdrawals.

2. Income limits

If you do not have a retirement pension plan at work you are NOT subject to the following income limits on your ability to contribute or deduct your contributions. If you do have a company sponsored plan please take note of the following limits. In order to contribute to a Roth IRA your modified adjusted gross income must be less than $120,000 – $135,000 for a single filer or less than $189,000 – $199,000 for a married couple filing jointly. There are no income limits on your ability to contribute to a traditional IRA. As stated above though there are limits on your ability to take a deduction. The deduction begins to phase out between $63,000 – $73,000 adjusted gross income for a single filer and $101,000 – $121,000 for a married couple filing jointly.

3. Required Minimum Distributions

With a traditional IRA, you are required to take distributions once you reach age 70 ½. This required minimum distribution (RMD) allows the government to finally begin to collect taxes on the money that has previously been sheltered from taxation. With the Roth IRA you are NOT required to take withdrawals during your lifetime which allows your contributions to continue to grow tax free until you need the money. There is a lot involved in deciding which is the best fit for you. For further information contact us at Sgroi Financial to set up a meeting with one of our financial planners. Also for more comparison between a traditional IRA and a Roth IRA, listen to my interview with Clay Moden on 106.5FM WYRK.

WEEKLY SEGMENT ON WYRK

You can catch our weekly Plan.Protect.Invest. segment live on WYRK 106.5FM at 7:20am every Wednesday. Each week we will have a Sgroi Financial planner on with Clay Moden and the WYRK morning show to discuss financial topics to educate and help their listeners. Since 1971, Sgroi Financial has proudly served Buffalo, NY and the Western New York community from our West Seneca location.