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.
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|
|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)|
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.
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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