Roth versus a Traditional IRA

Funding a retirement account is an important part of the financial planning process. When it comes to choosing between a Roth and a Traditional IRA, it's important to make an informed decision, since it's vital to get the optimal future income benefit from the money placed into either of these plans.

Traditional or Roth IRA

While many investors have completely switched to the Roth IRA, this isn't the right choice for everyone.  In fact, there are some significant advantages that a Traditional IRA offers versus the Roth.  At last count, we've found seven major differences between these two IRAs, which are summarized in the table below and explained in the following paragraphs.

  Traditional IRA Roth IRA
Age Limit for Contributions Yes No
Income Contribution Limits No Yes
Tax Deductions Yes (Note 1) No
Mandatory Distributions Yes No
Taxing of Distributions Yes (Note 2) No
IRS Form 8606 (Contributions) Yes (Note 3) No
IRS Form 8606 (Withdrawals) No (Note 3) Yes (Note 3)
  • Note 1:  eligibility rules apply to deductibility.
  • Note 2: applies to the tax-deferred portion of the account.
  • Note 3: applies to all tax-deferred portions of these accounts.

Age Limit for Contributions

Income Contribution Limits

  • Traditional IRA:  while there are limits on how much an individual can contribute, there is no income threshold that determines eligibility to contribute.
  • Roth IRA:  depending on the tax filing status, individuals earning too much money, may not be eligible to contribute.

Deductions from Federal Taxes

  • Traditional IRA:  there is a good possibility that deposits are tax deductible.  There are certain eligibility rules that depend on income, tax filing status, receipt of Social Security benefits, or if a retirement account is offered at work.
  • Roth IRA:  tax deductions are not allowed with these plans.

Mandatory Distributions

  • Traditional IRA:  there are required minimum distributions starting at age 70 1/2.
  • Roth IRA:  owners are never forced to take a distribution from their account.

Taxing of Distributions

  • Traditional IRA:  the tax-deferred portion of a distribution is taxed just like ordinary income.
  • Roth IRA:  in general, federal income taxes are not due on distributions.

IRS Forms for Contributions and Withdrawals

We mentioned that there are a total of seven differences, but we've only explained five so far.  That's because the final two differences have to do with filing paperwork with the IRS.

Individuals making a non-deductible contribution to a Traditional IRA need to file Form 8606.  Since Roth IRAs are always non-deductible, taxpayers never have to fill out a Form 8606 when making a contribution to their account.

When making a withdrawal, or taking a distribution from a Roth IRA, filing Form 8606 is required.  Filing Form 8606 is only required for non-deductible contributions made to a Traditional IRA.

Choosing Between a Roth and Traditional IRA

The above information should help taxpayers make a more informed choice when deciding between a Roth and Traditional IRA.  We've described seven differences between these two plans, and the outcome is pretty evenly divided between the two.

The choice is clearly a personal one, and depends on several factors such as income levels and age.  Individuals that wish to quantify some of the financial differences between these two accounts can try our Roth vs. Traditional Funds Calculator.


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