Traditional IRA vs. Roth IRA: Do you know the difference?

Roughly 33.2 million U.S. households own Traditional Individual Retirement Accounts (IRAs), which Congress created in 1974. Nearly 22.5 million households own Roth IRAs, which Congress introduced through the Taxpayer Relief Act of 1997.¹

Both are IRAs. And yet, each is quite different.

Know the limits

Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the account. The IRS taxes distributions from traditional IRAs as ordinary income, and if you take them before age 59½, the IRS may subject them to a 10-percent federal income tax penalty. Remember, under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Additionally, you may continue to contribute to a Traditional IRA past age 70½, under the SECURE Act, as long as you meet the earned-income requirement.

Filing single. For singles, the maximum tax-deductible contribution starts shrinking once your modified adjusted gross income (MAGI) reaches $65,000. Singles with adjusted incomes of $75,000 and above are not eligible for a tax deduction.²

Filing jointly. For married couples filing jointly, the rules become more complex. If you or your spouse participate in a workplace retirement plan, your IRA deduction phases out between $104,000 and $124,000. If only your spouse is covered, the 2020 phase‑out range rises to $196,000–$206,000.

Also, within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.³

Income impacts total contributions

Similar to a traditional IRA, the IRS limits contributions to a Roth IRA based on income. In 2019, Roth IRA contributions phase out for joint filers earning $193,000–$203,000 and single filers earning $122,000–$137,000.

Contribution limits

The IRS limits how much you can contribute each year to your IRAs, capping total annual contributions at $6,000. If you contribute $3,500 to a traditional IRA, you can contribute only $2,500 to a Roth IRA in the same year.⁴

Catch-up contributions. Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $7,000.⁵

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

^Citations.

^{1 – irs.gov/retirement-plans/individual-retirement-arrangements-iras, [01/09/2020]
2 – irs.gov/retirement-plans/ira-deduction-limits, [12/20/2019]
3 – irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan [01/08/2020]
4 – irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits [02/07/2020]
5 – Internal Revenue Service, 2019. The Tax Cuts and Jobs Act of 2017 eliminated the ability to “undo” a Roth conversion.}