U.S. taxpayers contemplate funding IRAs, there are two main type of IRA first is the Roth and second is the Traditional but which of the two is the better choice depends on the individuals choice and the making a better choice between the two considering the features and differences between the two. Here is an outline of some of the differences between these two retirement accounts, their eligibility requirements and other factors to consider when choosing between the accounts.
When we compare the Roth IRA vs. the traditional IRA we see some similarities and some differences like the contribution limits for the Roth and traditional IRAs are the same. The owner can contribute up to $5,000 to the IRA, plus an additional $1,000 catch-up contribution that is $6000 if the age has reached 50years and above by the end of the tax year but if the owner is aged below 50 years then the catch up contribution is excluded and he/she is able to make a contribution up to $5,000.
One of the major factors when comparing the Roth IRA VS Traditional or for deciding between the Roth and traditional IRA is the eligibility to deduct traditional IRA contributions and in turn get a tax break for the year making the contribution but these are subjected to some requirements being fulfilled whereas the contributions to Roth IRAs are never deductible.
Another factor that determines whether you should fund a Roth or traditional IRA is the income. On the income of the individual the eligibility to contribute to a Roth IRA is determined. If the income exceeds certain limit, the owner is not allowed to contribute to a Roth IRA. In addition, the Roth IRA contribution limit may be lowered if the income falls within certain ranges. Hence the owner has to carefully study the eligibility requirements and make the calculations or else consult the tax advisor to determine the maximum amount you that may be contributed to a Roth IRA. The Income caps do not apply to traditional IRA contributions and individuals are allowed to contribute to the account irrespective of the income.
Other important criteria in Roth IRA VS Traditional is the distributions or withdrawals in a traditional IRA, the owner must begin to withdraw following the year when the age of the owner reaches 70 and a half this means irrespective of the need the withdrawals must be done and gradually reduce the IRA balance and add the distributed amount, even if the owner is not in need of the funds. Whereas the Roth owners are allowed to withdraw any time and not just the earnings but the deposits or investment amounts can also be withdrawn but this is subjected to minimum requirements being fulfilled. There is no mandatory withdrawing age and if required the account can be maintained for life and passed on the heirs of the owner.
distributions from a traditional IRA are treated as ordinary income and may be subject to income taxes and distributed amount may be subjected to early-distribution penalties if the amount is withdrawn before the age of 59 and a half whereas the distributions in a Roth are tax free as the contributions are per-tax dollars and qualified Roth IRA distributions are tax and penalty free.