Roth IRA vs Traditional IRA is always a hot topic when it comes to investing in a retirement savings plan. Most want to know which retirement account is better. However, few understand the basics when it comes to investing in either of these retirement accounts. This makes the selection process even more difficult. To learn more about the basics, read on.
Roth IRA vs Traditional IRA | Important Facts to Remember
The Basics of These Retirement Accounts
A Roth IRA is a retirement account where you contribute after taxes are applied to your income. Many Americans see the tax benefit of future Roth IRA withdrawals, which follow Roth IRA regulations, as a great advantage.
Unlike a Roth IRA , where taxes are applied before the contributions, a Traditional IRA allows you to contribute to your account using your pre-taxed income. You will not incur any dividend income tax or capital gains tax unless you withdraw your account.
The IRS sets income limits for eligible applicants starting a Roth IRA. These limits differ from year to year and depend on marital status. Income eligibility for a Roth IRA is based entirely on professional earnings, not investment income or rental income. The following amounts are based on this year’s limits:
- Single or Head of Household
If you are single or the head of the family, the income limit is below $118,000.
There are two scenarios available for married people: filing jointly or separately. If you are married and filing jointly, or an eligible widow(er), the income limit is below $186,000. On the other hand, for those who are married and filing separately, the limit is below $10,000. The single category limit is also available if the individuals were not living with their partners for the past year.
Meanwhile, unlike a Roth IRA, a Traditional IRA does not have income limits. This is available for anyone who has a taxable income, made regular contributions throughout the year, and will not be 70 ½ years old by the end of the year.
If you compare a Roth IRA and a Traditional IRA, which one has the highest amount bracket? The answer is neither. Both retirement accounts have the same rules for contributions.
For people who are under 50 years old, they can contribute up to $5,500. Married couples can contribute separately, regardless of one or two working partners. For those who are 50 years old and above, the same limit is set. However, you have the option to add $1,000 as a “catch-up” contribution. This will give you a total of $6,500.
Taxable Withdrawals and Distributions
For a Traditional IRA, taxes apply to withdrawals and distributions from your deductible earnings and contributions. It is also essential to keep in mind that you may pay a 10% tax if you withdraw your earnings and contributions before you are 59 1/2 years old. However, there are exemptions.
On the contrary, Roth IRA does not apply taxes if your withdrawal is a qualified distribution. However, the same rule of an additional 10% tax applies if you are not qualified for an exemption.
Understanding the investing basics for a Roth IRA and Traditional IRA is a great stepping stone in successfully investing for retirement. Properly investing in these retirement accounts gives you long-term benefits you can enjoy during retirement.
Already invested in these retirement accounts? Which one works for you? Share your thoughts in the comments section below.