Traditional IRAs, which were created in 1974, are owned by roughly 31.1 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 19.2 million households.1
Both are IRAs. And yet each is quite different.
Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the account. Distributions from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.2
For individuals covered by a retirement plan at work—or for those whose spouse is covered by a retirement plan at work—the deduction for a traditional IRA in 2015 is phased out for incomes between $98,000 and $118,000 for married couples filing jointly, and between $61,000 and $71,000 for single filers.
Also within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.3
Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2015, contributions to a Roth IRA are phased out between $183,000 and $193,000 for married couples filing jointly and between $116,000 and $131,000 for single filers.
In addition to contribution and distribution rules, there are limits on how much can be contributed to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $5,500 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $2,000 in that same year.4
Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $6,500.5
If you meet the income requirements, both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: open an account! Email me your questions at financial.freedom@lpl.com or call 541-574-6464.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC
Information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.1. Investment Company Institute, 2015 2. Generally, once you reach age 70½, you must begin taking required minimum distributions from a traditional IRA. 3,4,5. Internal Revenue Service, 2015
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
