Retirement Planning

Roth and Traditional IRAs

So you're ready to start an IRA. But what kind of IRA do you need? This article outlines the two major IRA choices, their differences and what benefits they offer.

What's the Difference Between Roth and Traditional IRA?

An individual retirement account (IRA) is a personal savings plan under U.S. law that allows you to set aside money for retirement and offers tax advantages. And while there are many different types of retirement plans to select from, the two most popular are the traditional IRA and the Roth IRA. But how do you decide what's best for you?

Whether you decide on Roth IRA, traditional IRA, or both, there are financial consequences to consider. Along with IRA basics, the following are some important differences between these two retirement accounts, and other factors to consider when choosing the account that's right for you.

Roth IRA

 

A Roth IRA is a special type of individual retirement plan that is generally not taxed, provided certain conditions are met. Roth IRAs provide no tax break for contributions, but earnings and qualified withdrawals are generally tax-free. So with traditional IRAs, you avoid taxes up to the contribution limit when you put the money in. With Roth IRAs, you can avoid taxes when you take it out in retirement.

Roth contributions (not earnings) can be withdrawn penalty- and tax-free anytime, even before age 59½. Five tax years after the first contribution, you can withdraw up to $10,000 of Roth earnings penalty-free to pay for qualified first-time homebuyer expenses.

You can make contributions to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live. Also, all qualified distributions are tax-free, but as with any other retirement plans, nonqualified distributions from a Roth IRA may be subject to a penalty upon withdrawal.

Traditional IRA

With a traditional IRA, you may be able to deduct some or all of your contributions from your taxable income, and may also be eligible for a tax credit equal to a percentage of that contribution. Amounts in a traditional IRA, including earnings, generally are not taxed until distributed. Amounts you withdraw from your IRA are fully or partially taxable in the year you withdraw them.

Contributions to traditional IRAs lower your taxable income in the contribution year. That lowers your adjusted gross income, helping you qualify for other tax incentives you wouldn't otherwise get, such as the child tax credit or the student loan interest deduction. You can withdraw up to $10,000 without the normal 10 percent early-withdrawal penalty to pay for qualified first-time homebuyer expenses. However, you'll pay taxes on the distribution.

You can set up a traditional IRA at any time and make contributions as long as you were under age 70½ at the end of the tax year, and you (or your spouse, if you file joint return) received taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment.

Individual Retirement Account Summary

For some, their eligibility to deduct traditional IRA contributions can be the deciding factor in choosing between a Roth and traditional IRA. However, being eligible to deduct your contribution doesn't mean that the traditional IRA is the better choice. Consider whether the benefits of the Roth IRA - such as tax-free qualified distributions - outweigh the benefits of a deduction. Finally, you may want to consider splitting your contribution between both types of IRAs and enjoy the benefits of both.

Always consult with a financial advisor or insurance professional before determining which option is best for you, your retirement planning and your financial situation.

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Roth or Traditional IRA

In this article you can explore the difference between Roth and Traditional IRA. An IRA, an individual retirement account, allows you to set aside money for retirement under in a personal savings plan under U.S. law. However, there are two types of IRA available: traditional or Roth IRA. While understanding the basics of traditional versus Roth IRAs is important, it's also important to consider what is going to be best for you. Consider speaking with your financial adviser or insurance professional to determine which option is best for you. For more information, visit our learning center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

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