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Traditional and Roth IRAs Explained: Understand Your Retirement Accounts

Traditional and Roth IRAs Explained: Understand Your Retirement Accounts

December 10, 2023

Traditional IRAs and Roth IRAs are both types of individual retirement accounts, but they have key differences, primarily in how they are taxed and when you can withdraw funds. Here are the main differences:

  1. Tax Treatment:

    • Traditional IRA: Contributions are typically made with pre-tax dollars, meaning you can often deduct your contributions from your taxable income. The money grows tax-deferred, but you pay income taxes on withdrawals in retirement.
    • Roth IRA: Contributions are made with after-tax dollars, so there’s no tax deduction when you contribute. The benefit is that withdrawals in retirement are tax-free, as long as certain conditions are met.
  2. Withdrawal Rules:

    • Traditional IRA: You must start taking required minimum distributions (RMDs) at age 72, regardless of whether you need the money. Withdrawals before age 59½ may incur a 10% early withdrawal penalty in addition to income tax.
    • Roth IRA: There are no RMDs during the owner's lifetime, giving you more flexibility. You can withdraw your contributions (but not earnings) at any time without penalty. To withdraw earnings tax-free, the account must be at least five years old, and you must be 59½ or meet other qualifying conditions.
  3. Income Limits:

    • Traditional IRA: Anyone with earned income can contribute, but if you or your spouse has a retirement plan at work, the tax deductibility of your contributions may be phased out at certain income levels.
    • Roth IRA: Contributions are subject to income limits. If your income exceeds a certain level, you may be partially or entirely unable to contribute.
  4. Contribution Limits:

    • Both IRAs typically have the same contribution limits, but these can change annually and are subject to cost-of-living adjustments.
  5. Age Limits:

    • Traditional IRA: You can no longer make contributions once you reach age 70½.
    • Roth IRA: There is no age limit for contributions as long as you have earned income.
  6. Estate Planning Considerations:

    • Traditional IRA: Beneficiaries other than a spouse will have to take distributions over a 10-year period after inheriting the account.
    • Roth IRA: Beneficiaries also have a 10-year distribution period, but distributions are typically tax-free.

The choice between a Traditional IRA and a Roth IRA often comes down to your current tax rate versus your expected tax rate in retirement, as well as your specific financial goals and circumstances.

For a comprehensive review of your personal situation, always consult with a tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give tax advice.