Retirement Planning: Traditional IRA Versus Roth IRA

• Limits on annual contributions are the same for both traditional and Roth IRAs (or a combination of the two) and vary by age, year of contribution and income.
• In 2024, maximum contributions for IRA owners age 49 and under are $7,000. For those 50 and older, the maximum is $8,000.
• Contributions may not exceed 100% of earned income. For example, a 21-year-old with $3,500 in total earning may only contribute up to that amount, not $6,500.
• An IRA owner may contribute to an IRA for a spouse who works part time or for a nonworking spouse.
• Combined yearly IRA contributions for both spouses can’t exceed their combined earnings for the year.
• Roth IRA contributions may be limited based on the Modified Adjusted Gross Income (AGI).

• Traditional IRA contributions may be tax deductible, but Roth IRA contributions are not.
• The maximum deduction in 2024 for a traditional IRA is $7,000 ($8,000 for individuals age 50 and over).
• A traditional IRA is subject to restrictions on who may take full advantage of the deduction. The full deduction is available for wage earners who are not active participants in other qualified retirement plans.
• For wage earners who are active participants in another retirement arrangement, the deductible amount is gradually phased out according to the person’s filing status and AGI. In 2024, the phase-out for single filers begins when AGI reaches $77,000, and the deduction is lost completely at $87,000. For married couples fi ling jointly, the 2024 phase-out amounts are $123,000 and $143,000, respectively.
• Roth IRA contributions are not tax deductible, but no federal income tax is due on distributions, provided certain requirements are met.
• In 2024, the phase-out reducing the allowable Roth contribution begins when a single filer’s AGI is between $146,000 and $161,000, and when a joint filer’s AGI is between $230,000 and $240,000. Single filers with AGI above $161,000 and joint filers above $240,000 may not contribute to a Roth IRA.
• If one spouse is covered by a qualified employer-sponsored retirement plan and the other is not, and their joint income is less than $218,000, the amount contributed to the non-covered spouse’s IRA would be fully deductible. The deduction is phased out if the couple’s joint income is between $218,000 and $228,000.
• Participation in another qualified retirement arrangement is not relevant with a Roth IRA. If the Roth IRA owner also owns a traditional IRA, the maximum contribution limit applies to the total contributions to both types of IRAs.

• IRA owners may begin taking distributions without tax penalty at age 59½. Earlier distributions are generally subject to a 10% penalty tax on the amount includible in gross income.
• Exceptions to the 10% penalty include distributions: (1) made when the owner dies or becomes disabled, (2) set up as substantially equal periodic payments within the terms of the law, (3) used to pay for medical care within certain limitations, (4) used to pay for qualified higher education expenses, (5) used to pay for qualifying first-time homebuyer expenses up to $10,000 lifetime maximum, (6) taken within one year of the birth or adoption of a child to pay related expenses (up to $5,000 per parent), (7) made to anyone with a principal residence in a federally declared disaster area who suffers a loss as a result of that disaster, or (8) rolled over within 60 days.
• A traditional IRA requires the owner to begin taking minimum distributions after age 73. Owners who fail to meet the requirement face a 25% penalty tax on the amount that should have been distributed but was not (10% if the distribution error is corrected quickly). This doesn’t apply to lifetime Roth IRA distributions.
• Traditional IRA distributions are taxed as ordinary income in the year they are received.
• IRA owners (including SEP, SIMPLE and Roth IRAs) can make only one “60-day rollover” from one IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs owned. Trustee-to-trustee transfers between IRAs and conversions of traditional IRAs to Roth IRAs are not limited.

IRAs offer an effective, tax-advantaged way to save for retirement. Choosing between a traditional IRA and a Roth IRA in specific situations involves such considerations as the individual’s age, income and participation in qualified plan arrangements.

An individual retirement account (IRA) is an account available to people with earned income (and, in some cases, their non-working spouses) to set aside a portion of earnings for retirement.

With a traditional IRA, contributions are tax deductible, and tax is deferred on contributions and earnings until the money is withdrawn (typically at retirement).

With a Roth IRA, contributions are not tax deductible, but distributions are not taxed when withdrawn. Earnings on Roth contributions may also be withdrawn tax free under certain circumstances.

The wage earner opens a trust or custodial account with a bank, a credit union, a savings and loan, or a brokerage firm. Another option is to purchase an individual retirement annuity contract.

In 2024, participants in traditional and Roth IRAs are subject to annual contribution limits of $7,000 for those age 49 and under, and $8,000 for individuals age 50 and over. The IRS limits contributions to 100% of earned income, if less than the dollar maximums. The IRS also limits contributions for nonworking spouses.

Under a Roth IRA, the contribution amount may be limited or phased out depending on AGI and marital status. Under a traditional IRA, participation in an employer-sponsored retirement plan, such as a pension or 401(k) plan, may limit or phase out the deduction, depending on AGI and marital status.

Distributions from a traditional IRA are taxed as ordinary income to the extent they are attributable to tax-deferred contributions and earnings. Distributions from a Roth IRA are not taxed as long ascertain requirements are met, since contributions were made with after-tax dollars. Distributions before age 59½ are subject to a 10% penalty tax unless certain exceptions apply. Traditional IRA owners must begin required minimum distributions at age 73. Failure to take these distributions results in a 25% penalty on any amount that should have been taken but was not (10% if the distribution error is corrected quickly). Roth IRA owners face no such requirements.