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Difference Between Traditional IRA and Roth IRA

Traditional IRA vs Roth IRA

The Individual Retirement Arrangement (or account), also known as IRA for short, is a form of retirement plan in which individuals can earn and allocate funds for retirement savings. Several different types of accounts exist in the worlds of IRAs, each of them having a different fiscal goal. The most commonly used of these accounts are the traditional IRA and the Roth IRA. Both of them having distinctive advantages and disadvantages like tax breaks.

The traditional Individual Retirement Arrangement is a profile of IRA which allows contributions to be tax deductible depending on the individual’s income level, and the contribution that you deposit on your account is tax-deferred. This means that taxes are paid on withdrawals after retirement, and these withdrawals are considered as ordinary income when they reach the age of 59 ½ . The owners of traditional IRAs must begin regular withdrawals before reaching 70 ½ years of age. Failure to do so will lead to half of the mandatory amount confiscated by the Internal Revenue Service. There is also a ten-percent penalty for early withdrawals, but there are exceptions to it.

These exceptions are:

Unreimbursed medical expenses
Medical insurance
Disability
Beneficiary of IRA
Higher education expenses
First-time homeowner
Rollover into another qualified plan
Annuity distributions

Under certain circumstances, some deposits made are not deductible. If you are covered by a retirement plan at work, the deduction for your contribution to a traditional IRA is reduced (phased out).
In a traditional IRA, you can no longer contribute after the age of 70 ½ because of the Required Minimal Distribution (also known RMD) unlike the Roth IRA.

In a Roth Individual Retirement Arrangement, tax breaks are different. Contributions to a Roth IRA are not tax deductible. You will still be taxed even if you have deposited in the Roth IRA. Those holding a Roth IRA do not get immediate tax savings unlike the traditional IRA. This means that if you have a Roth IRA and you end up with a lower income bracket than your present one, you will end up having less usable cash. Heavier penalties can also apply to a Roth IRA for early withdrawals because of the federal income tax plus a ten-percent penalty on the amount. Exceptions similar to the traditional IRA can still be applied, like first-time homeowners.

One of the bigger advantages of the Roth IRA is that the qualified withdrawals are tax free, and there are fewer withdrawal restrictions and requirements. Obtaining eligibility for a Roth account is stricter, as Congress has limited those who can contribute to a Roth IRA based upon income. It is the type of account intended for those with regular incomes and not for the rich. For example, as of 2011, joint filers can only be qualified if the modified adjusted gross income is at least $169,000 and not exceeding $179,000. Beneficiaries of a Roth account are also subject to RMD responsibilities.

Summary:

1.Qualified Roth IRA withdrawals are never deductible while a traditional IRA may be deductible. Additionally, for a traditional IRA, regular withdrawals are a must after qualifying for the minimum age of withdrawal.
2.For a traditional IRA, no contributions are allowed after the taxpayer reaches the age of 70 ½.
3.Unless qualified, both accounts can be subjected to penalties; however, there are exceptions to this.
4.Unlike the traditional account, beneficiaries of a Roth IRA are subject to RMD responsibilities.


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