What is an IRA? Traditional vs. Roth Accounts


An IRA is an Individual Retirement Account (or Arrangement). They are investment accounts to help you save for retirement, and they come with different tax benefits, depending on which IRA you set up. There are two main types of IRAs: Traditional and Roth.

What is a Traditional IRA?

With a Traditional IRA, contributions made in a given year are tax-deductible. For example, if you contribute $6,000 for the year 2019 and are qualified, you can deduct that money from your taxable income. However, once you start to receive disbursements, you will have to pay taxes on what you withdraw, including both contributions and investment earnings. This is ideal if you think you will be at a lower tax rate in the future.

Want to know if you’re qualified for a full tax deduction? Check out these links from the IRS to see if you qualify.

If you are covered by a retirement plan at work
If you are not covered by a retirement plan at work

What is a Roth IRA?

Unlike a Traditional IRA, contributions to a Roth IRA aren’t tax deductible. However, Roth IRAs do have a great benefit. When you start to withdraw from your account, the money is tax-free, including what you earned on your investments. This is because the money you put in came after taxes were taken out of your paycheck, so you already paid them. If you think you will have a higher tax rate in retirement, this is the IRA for you.

Who Can Open and Contribute to an IRA?
Traditional IRA

You can open a Traditional IRA if you (or your spouse, in the case of filing a joint return) received taxable compensation during the year and you aren’t age 70 ½ by the end of the year. You can have a Traditional IRA even if you have another retirement plan (i.e. 401k). If both spouses have compensation, each person can open an IRA, but you can’t have the same IRA.

Roth IRA

No matter what your age is, you can open a Roth IRA. In fact, you can open one for your child if you wanted to. But there are certain rules about who can contribute and how much depending on your income and filing status. To see if you can contribute to a Roth IRA, check the IRS Roth contribution rules.

What Are The IRA Contribution Limits? When Can I Contribute?

For 2019, if you’re under the age of 50 you can contribute up to $6,000. However, if you’re at or above the age of 50, you’re allowed to contribute up to $7,000. This is so you can “catch up” if you didn’t contribute enough for retirement in the years before. If you contribute more than the maximum amount, the excess contribution is taxed at 6% for every year it remains in the account. To avoid the tax, all you have to do is withdraw the excess money (and any earned income from it) before your tax return is due.

Unlike most employer retirement plans, …read more

Source:: Investment You