04 Apr Traditional or Roth IRA?

Posted at 12:40h in IRA, Retirement by

It is likely you have heard about an IRA (traditional) and a Roth IRA but aren’t sure what the difference is. Here are a few of the highlights of each.

Traditional IRA

How does it work?  A traditional IRA lets you deduct savings contributions from your taxes, which lowers your taxable income for the year — but you pay taxes on the money when you withdraw it in retirement.

Are there income limitations?  You must have earned income, but there’s no maximum limit.2

How much can you contribute?  Up to $7,000; if you’re 50 or older, you can contribute an additional $1,000 in 2024.

When do you pay taxes?  In retirement, when you withdraw your savings.

What are the rules about withdrawals?  You can withdraw contributions and earnings penalty-free at age 59½, or earlier for certain hardships. You have to start taking required minimum distributions after age 73.

 

Roth IRA

How does it work? A Roth IRA uses after-tax money, meaning you pay taxes on your contributions at the time you put the money in and, future withdrawals are tax free as long as you follow Roth IRA rules.1

Are there income limitations? To contribute the full amount allowed by the IRS in 2024, your Modified Adjusted Gross Income (MAGI) must be below:

  • $146,000 for a single tax filer.
  • $230,000 for a joint tax filer.

How much can you contribute?  Up to $7,000; if you’re 50 or older, you can contribute an additional $1,000 in 2024.

When do you pay taxes?  Up front, before you contribute. Your earnings then grow tax free. There are no taxes or penalties on withdrawals made after age 59½.1

What are the rules about withdrawals? You can withdraw contributions at any time, without penalty. You can withdraw earnings, penalty-free at age 59½, or earlier for certain hardships, as long as you’ve followed the rules of a Roth IRA.1  You’re not required to withdraw your money at any age.

 

If you are not sure which one (or both) to utilize, it’s important to get advise from a professional that understands the difference and how they may work for you. We at Stephen & Associates are here to hep. Let’s talk about your options.

 

  1. Your account must be open for 5 years and you must be over 59 ½ to be eligible for qualified tax-free withdrawals of earnings.
  2. Deductibility of contributions is dependent upon coverage by an employer-sponsored retirement plan for you or your spouse and your Modified Adjusted Gross Income (MAGI).
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