What is the difference between a Roth IRA and a Traditional IRA, and which one is tax deductible?

What is an IRA?
To begin, Traditional IRAs and Roth IRAs are two popular individual retirement plans. That being said, Traditional IRAs are common if your salary exceeds the amount required to qualify for a Roth IRA. You’re also eligible for a tax deduction and anticipate being in a reduced tax rate after retirement.

Roth IRAs, on the other hand, are popular among those with a Modified Adjusted Gross Income (MAGI) who are below the maximum, seek tax-free withdrawals, avoid minimum distributions, or anticipate being in the same or higher tax rate in retirement.

In other words, traditional IRAs are tax-deductible. The amount you deduct depends on the tax year. Roth IRAs are not tax-deductible.

There are significant distinctions between the two IRAs.

Traditional IRA

• Tax benefits include tax-deferred growth and tax-deductible contributions.
• You can contribute until you reach 70 ½ years old.
• Your contribution amounts are unaffected by your income. There is no limit to your contributions.
• If you remove pre-tax contributions and earnings, you will have to pay taxes.
• If you remove before age 59 ½, you will incur a 10% early withdrawal penalty.
• The Required Minimum Distributions (RMDs) are the minimum amount you must remove from your IRA each year. This must be taken in the year you reach 70 ½.

Roth IRA

• One tax advantage is that both growth and withdrawals are tax-free.
• Contribute at any age.
• Your income determines how much you contribute.
• When you withdraw contributions, there are no withdrawal taxes, and you can withdraw earnings without incurring federal income taxes.
• If you withdraw before age 59 ½, you will face a 10% early withdrawal penalty and an extra 10% tax.
• The Required Minimum Distributions (RMDs) do not apply.

This entry was posted on Sunday, April 6th, 2025 at 9:03 pm and is filed under Deductions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.