Traditonal v Roth IRA'sSubmitted by Karp Financial Strategies on January 23rd, 2019
Traditional vs. Roth IRA’s
Perhaps both Traditional and Roth IRA’s can play a part in your retirement plans.
Jeffrey P. Kendall, CFP®
IRA’s can be an important tool in your retirement savings belt, and whichever type you choose to open, could have a significant impact on how those accounts might grow, and how you might be taxed.
Per the IRS definition, an Individual Retirement Arrangement, or IRA as we know them, is a tax-favored personal savings account, which allows you to set aside money for retirement. There are several different types of IRA’s, including traditional IRA’s and Roth IRA’s, which are the two most common. Traditional IRA’s, created in 1974, are owned by roughly 35.1 million U.S. households. While Roth IRA’s, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 24.9 million households.1
Both kinds of IRA’s share many similarities, and yet, each is quite different. Let's take a closer look.
If you have earned income and are not covered by a retirement plan at work, like a 401(k), Traditional IRA’s allow you to make fully tax-deductible contributions into that account, with all potential gains tax deferred until you take distributions. Starting in 2019, if you or your spouse are covered by a company retirement plan, a full deduction is allowed for incomes under $103,000, a partial deduction is allowed for incomes between $103,000 and $123,000 and no deduction over $123,000 for married couples filing jointly. For single filers, the partial phase out starts at $64,000, with no deduction for income over $74,000.2,3 Distributions from Traditional IRA’s are taxed as ordinary income, but if taken before age 59½, they may be subject to a 10% federal income tax penalty.
As for Roth IRA’s, if you have earned income, you can make non-deductible contributions to a Roth IRA with your after-tax dollars, all within certain income limits, of course; though unlike Traditional IRA’s, access to a company retirement doesn’t matter. For 2019, contributions to a Roth IRA start to phase out at an income level of $193,000, with no contributions allowed at $203,000 for married couples filing jointly. It is the same for single filers starting at $122,000 up to $137,000.2,3 To qualify for a tax-free and penalty-free withdrawal of earnings, your Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
In addition to contribution and distribution rules, there are limits on how much you can contribute to either IRA, or any combination of the two. That is, you cannot put more than $6,000 per year into your Roth and/or Traditional IRA’s combined. So, if you contributed $3,500 in a given year into a Traditional IRA, contributions to a Roth IRA would be limited to $2,500 in that same year.4
For the Gen-Xer’s who have reached age 50 by the end of the tax year, they can qualify for annual “catch-up” contributions of up to $1,000. So, for these IRA owners, the 2019 IRA contribution limit is $7,000.4
If you meet the income requirements, both Traditional and Roth IRA’s can play a part in your retirement plans. Please consult your tax professional to make sure you can contribute. After that, just figure out which will work better for you, then only one task remains…open an account.
Jeff Kendall is a CERTIFIED FINANCIAL PLANNER™. If you have questions or you are interested in opening a Traditional or Roth IRA, Jeff can be reached at email@example.com or at 704-658-1929.
Securities and Advisory Services through LPL Financial; LPL Financial is a Registered Investment Advisor, member FINRA, SIPC.
Some of 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.
1 - https://www.ici.org/pdf/per23-10.pdf [12/17]
2 - https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-yo... [6/14/18]
3 - https://money.usnews.com/money/retirement/articles/new-401-k-and-ira-limits [11/12/18]
4 - https://www.irs.gov/retirement-plans/plan-participant-employee/retiremen... [11/2/18]