Traditional IRA and Roth IRA both are a popular retirement plans and there is always a confusion between the two here are some feature and the possible differences and similarities between the two.
Traditional IRA is a retirement plan that is available to everyone as there are no income restrictions. The traditional IRA allows the tax deductions on contributions depending on the income level, and it is possible that the withdrawals can be made when the owner turns the age of 59 and a half years of age and after the owner turns 70 and a half years of age the withdrawals become mandatory, the funds withdrawal can be used for the purchase of a variety of assets like of the stocks, bonds, certificates of deposits, etc. the income tax is applicable and paid on the earnings gained from the withdrawals amount.
Roth IRAthis retirement plan can be owned by a single owner or a married couple but the point of owning is restricted to income and to get the Roth Ira the individuals need to fulfil the income earned requirement that is based on the modified adjusted gross income (MAGI) are the ability to contribute depends on the income if the individual is able to make more than $99,000 individually or $156,000 as a married couple, it is only after fulfilling this requirement the individual can contribute in the retirement plan, but the contributions are not tax deductible and there is no mandatory withdrawal clause in this particular retirement plan and the retirement plan can last up-to life time, because of the no mandatory withdrawal clause there is no age distribution clause either. the withdrawal funds can be used to purchase a variety of assets stocks, bonds, certificates of deposits, etc. and all the earnings done on the withdrawal are tax –free as the tax is applicable on the contributions Principal contributions can be withdrawn any time without penalty but requires certain conditions to be fulfilled.
The biggest difference between the Traditional and Roth IRA is the way tax treatments are done with them suppose the individuals earn $50,000 a year and put $2,000 in a traditional IRA, then the amount on which tax is payable comes to $48,000(50,000 – 2,000) that is after deducting the 2000 contributed in the Traditional IRA in the current year tax is payable on the $48,000 and later after the withdrawals are done the individual is forced to pay tax on the earnings earned from the withdrawals and the income tax becomes liable on all of the capital gains, interest, dividends, etc., that were earned over the past years.
But, if the same $2,000 is invested in the Roth IRA, for the current year there would be no tax deductions and the tax will be payable on the entire income amount that is 50,000. And when the individuals reachretirement age, the owner would be able to withdraw all of the money 100% tax free. The Roth IRA is more sensible that the traditional but the disadvantage is that the qualifications need to be fulfilled they are a person filing their taxes as single cannot make over $95,000 and in case of Married couples a maximum income of $150,000 yearly.