Traditional IRA vs. Roth IRA

Individual Retirement Accounts (IRAs) are a great way to save for the future because of the tax advantages they provide. The tax advantages you gain will depend on your annual income, whether you are covered by your company's retirement plan, and whether you contribute to a Traditional IRA or a Roth IRA.

What’s the difference between a Traditional IRA and a Roth IRA?

	Roth IRA	Traditional IRA
Deductibility	Contributions are never deductible.	Contributions may be deductible, depending on tax-filing and active-participant statuses, as well as income amount.
Age Limitation	No age limitations on contributions.	No contributions allowed after and for the year the taxpayer attains age 70.5.
Income Caps for Contributions	Income caps may prevent taxpayers from contributing.	No income caps will prevent taxpayers from contributing.
Treatment of Earnings on IRA Investments	Earnings grow tax deferred. Qualified Distributions, such as being over 59-1/2, and having the account for at least five years, are tax free, including distribution of earnings.	Earnings grow on a tax-deferred basis. Earnings are added to taxable income for the year distributed.
Distributions Rules	Principal contributions can be withdrawn any time without penalty. Distributions are tax and penalty free if qualified. No Mandatory Distribution Age.	Withdraws begin at age 59.5 and are mandatory by 70.5. Distributions will be treated as ordinary income. All funds withdrawn (including principal contributions) before 59.5 are subject to a 10% penalty (subject to exception).
Required Minimum Distribution	Owners are not subject to the RMD rules. However, beneficiaries are subject to the RMD rules.	IRA owners must begin distributing minimum amounts beginning Apr 1 of the year following the year they turn age 70.5. Beneficiaries are also subject to the RMD rules.

Which one is better?
One factor that determines whether a Roth or Traditional IRA is better for you is your income, which dictates your eligibility to contribute to a Roth IRA. To be eligible, your income must be the following:
1. no more than $160,000 if you are married and file a joint tax return.
2. no more than $10,000 if you are married and lived with your spouse for any period during the tax year, but filed a separate tax return.
3. no more than $110,000 if you file as 'single', 'head of household', or 'married filing separately' and did not live with your spouse at any time during the tax year.

From a general tax perspective, the Roth IRA is the better choice --
1. If you're in a low tax bracket when saving, the Roth IRA is likely to be better.
2. Conversely, if you're in a high tax bracket when you contribute and expect to be in a much lower tax bracket when you withdraw your earnings, a traditional IRA may be the better choice.