Tips For Making An IRA Comparison Between Roth IRA VS Traditional IRA

The IRA plan comprises of three types- Deductible IRA, Non-Deductible IRA and Roth IRA. Usually, in comparison, the deductible and non-deductible IRAs are clubbed under the category of Traditional IRAs.

It is because these two plans have no difference other than the treatment of taxes. In the case of the Roth IRA, there are many similarities and differences with the traditional IRA account.

To see which of these retirement savings accounts suits your needs, there must be a comparison of Roth IRA vs traditional IRA.

The major differences of these individual retirement plans are in terms of their eligibility, limits of annual contribution, taxes and penalties, rules of withdrawals and rate of returns. The similarities are that all of them have an IRA contribution limit. They have a penalty on excess contribution which is 6% of your annual income. Both the plans facilitate tax-deferred growth on the interest while tax on the contribution (as a part of the annual income) depends on the plan. There is no extension on the IRA contribution deadline.

While anyone employed below the age of 70 years in the current calendar year is eligible to open a traditional IRA account. For opening a Roth account, your individual income should be either below or $114,000 or the joint income should not be more than $166,000. There is a ceiling on your maximum contribution which is different in both of instances of IRAs. But it is to be noted that if you have a Roth as well as a Traditional IRA, even then there is a fixed limit on your total contribution.

The crucial difference between Roth IRA vs traditional IRA is the federal tax on the contribution. While, the contribution to the traditional IRA is not subjected to taxation, the contributions to the Roth IRAs are subjected to taxation. The situation is reversed in case of distribution. At that time, the assets of a traditional IRA is subjected to ordinary tax deductions while the Roth IRAs are exempted from penalty and tax liabilities if all the conditions are met. "You want to pay taxes now or later." seems to be an appropriate phrase to describe the differences between Roth IRA vs traditional IRA.

Generally, people prefer to go for Roth IRAs because they do not want to pay taxes on the interest (which can be quite significant) that their money has earned after years of careful investments. Also there are ways through which Roth IRAs have proved to be advantageous. When you withdraw money for situations like buying your first house, educational expenses and health issues, you do not need to pay any penalties. Also, when you have maintained the account for 5 years, then the Roth IRA allows you to withdraw your asset before the age limit of 59.5 years. Roth IRAs allow you to continue your contributions after the age limit of 70.5 years also. In other words it is a lifetime account.

However, in the case of traditional IRAs you have the option of withdrawal if you qualify in the category of 'hardships' without paying any penalty on it. Thus, comparatively Roth IRAs are much flexible than Traditional IRAs. But the biggest hurdle is that not everyone qualifies for the Roth IRAs account.