How does a Traditional IRA differ from a Roth IRA? Which one is right for you? Once you know the answer to the first question, you may be able to answer the second.
Exploring Your IRA Options: The Basics
A Traditional IRA may make sense if you:
- are eligible for a Traditional IRA deduction,
- are not eligible to contribute to a Roth IRA,
- anticipate a higher tax rate while saving,
- anticipate a lower tax rate during retirement,
- are interested in taking required minimum distribution amounts during retirement, or
- are not concerned about tax savings for beneficiaries.
A Roth IRA may be more fitting if you:
- are not eligible for a Traditional IRA deduction,
- anticipate a lower tax rate while saving,
- anticipate a higher tax rate during retirement,
- want to avoid RMDs,
- are concerned about tax savings for beneficiaries, or
- are not eligible to contribute to a Traditional IRA because of the age limit.
If you are eligible for both a Traditional IRA and a Roth IRA, you can contribute to both as long as your total contributions for the year do not exceed the annual limit.
Contribution Eligibility
Roth IRA
You are eligible to contribute if you earn compensation or file a joint tax return with a spouse who earns compensation, and your modified adjusted gross income is less than or within the defined limits.
Traditional IRA
You are eligible to contribute if you earn compensation or file a joint tax return with a spouse who earns compensation and you are younger than 70 1/2.
Income Tax Deductions
Roth IRA
Roth IRA contributions are not tax-deductible.
Traditional IRA
Whether your Traditional IRA contribution is deductible on your federal income tax return depends on your marital and tax-filing status, your MAGI, and whether you or your spouse actively participates in an employer-sponsored retirement plan. If neither you nor your spouse is an active participant, you are eligible to deduct your full contribution.
IRA Benefits
Roth IRA
You may qualify for a saver’s tax credit of up to $1,000 when you make a contribution. Because all Roth IRA contributions must be included in your taxable income, and therefore are not tax-deductible, you can withdraw your contributions at any time, tax- and penalty-free.
Any earnings generated within the IRA are tax-deferred (you do not pay tax on the earnings until you withdraw them). If you satisfy the qualified distribution requirements, you can withdraw the earnings tax-free.
You are never required to take money out of your Roth IRA, no matter what your age.
Traditional IRA
You may qualify for a saver’s tax credit of up to $1,000 when you make a contribution. Any earnings generated within the IRA are tax-deferred (you do not pay tax on the earnings until you withdraw them).
If your traditional IRA contributions are tax-deductible and therefore tax-deferred, you do not pay taxes on them until you withdraw the money. Any after-tax amounts (nondeductible contributions) within your IRA can be withdrawn tax- and penalty-free.
Withdrawal Requirements
Roth IRA
Roth IRA owners are never required to take distributions. After your death, however, your beneficiaries may be subject to required distributions.
Traditional IRA
Traditional IRA owners are required to take annual minimum distributions beginning with the year they turn age 70 1/2. Your beneficiaries also will be subject to required distributions.
Contact Us for Specifics
As you are exploring your IRA options, remember that a variety of factors could make a difference in your specific situation, and we would be glad to provide you with more information about them.
Contact us through our Georgia Heritage Federal Credit Union website or step into one of our credit union branches throughout the Savannah Metropolitan Area.
