When it comes to planning for retirement, Individual Retirement Accounts (IRAs) are a popular investment option. There are two main types of IRAs: traditional and Roth. Both have their own unique features, advantages, and drawbacks. In this article, we will explore the key differences between a traditional and a Roth IRA.
Tax Treatment
One of the main differences between a traditional and a Roth IRA is the way they are taxed.
- Traditional IRA
Contributions to a traditional IRA are tax-deductible, meaning you can deduct the amount you contribute from your taxable income, thereby reducing your overall tax burden for the year. However, when you withdraw funds from your traditional IRA during retirement, your withdrawals will be taxed as ordinary income.
- Roth IRA
On the other hand, contributions to a Roth IRA are made with after-tax dollars, so you don’t get an immediate tax break. However, the benefit comes during retirement when you can make qualified withdrawals tax-free. This can be an advantage if you expect to be in a higher tax bracket during retirement.
Income Limits
There are income limits associated with both types of IRAs, which may affect your eligibility to contribute.
- Traditional IRA
While there are no income limits to contribute to a traditional IRA, there are limits that affect the tax deductibility of your contributions. If you or your spouse are covered by a workplace retirement plan, your ability to deduct contributions may be reduced or eliminated based on your modified adjusted gross income.
- Roth IRA
Roth IRA contributions are subject to income limits. If your income exceeds the specified limits, you may not be able to contribute directly to a Roth IRA.
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