A common question when planning retirement funds is “Should I start a Roth IRA or a Traditional IRA?” Your personal goals and circumstances will determine which type of IRA is right for you.
Listed below are the main comparisons between the two funds.
|Traditional IRA||Roth IRA|
|Maximum yearly contribution (2019)||Lesser of $6,000 or 100% of earned income ($7,000 if age 50 or older)||Lesser of $6,000 or 100% of earned income ($7,000 if age 50 or older)|
|Income limitation for contributions||No||Yes|
|Tax-deductible contributions||Yes. Fully deductible if neither you nor your spouse is covered by a retirement plan. Otherwise, your deduction depends on your income and filing status.||No. Contributions to a Roth IRA are never tax deductible.|
|Age restriction on contributions||Yes. You cannot make annual contributions beginning with the year you reach age 70 1/2.||No|
|Tax-deferred growth||Yes||Yes; tax free if you meet the requirements for a qualified distribution.|
|Required minimum distributions during lifetime||Yes. Distributions must begin by April 1 following the year you reach age 70 1/2.||No. Distributions are not required during your lifetime.|
|Federal income tax on distributions||Yes, to the extent that a distribution represents deductible contributions and investment earnings.||No, for qualified distributions. For nonqualified distributions, only the earnings portion is taxable.|
|10% penalty on early distributions||Yes, the penalty applies to taxable distributions if you are under age 59 1/2 and do not qualify for an exception.||No, for qualified distributions. For nonqualified distributions, the penalty may apply to the earnings portion. (Special rules apply to amounts converted from a traditional IRA to a Roth IRA.)|
|Includable in taxable estate of IRA owner at death||Yes||Yes|
|Beneficiaries pay income tax on distributions after IRA owner’s death||Yes, to the extent that a distribution represents deductible contributions and investment earnings.||Generally, no, as long as the account has been in existence for at least five years.|
In General, if you wish to minimize taxes during retirement or preserve assets for your heirs, a Roth IRA may be the way to go. A traditional IRA may make more sense if you can make deductible contributions and want to lower your taxes while you’re still working.
Determining the best retirement plan for your personal situation can be confusing and overwhelming. At Kuderer Financial we help our clients make educated financial decisions with confidence. Contact us today to get your investment questions answered.
Prepared by Broadridge Investor Communication Solutions, Inc.