What's the Difference Between an IRA and a Roth IRA?

Updated for 2019

IRA stands for individual retirement account, and for years it only came in one flavor, now known as “traditional.” The IRA offered a tax-advantaged way to save for retirement, and it came with some good benefits and some tight restrictions.

Then came the Roth IRA, which works opposite, similarly, and differently than a traditional IRA.

How they’re opposite: In a traditional IRA, the money you put in is tax-deductible, and the money you take out during retirement is taxable. With a Roth IRA, you don’t get a tax deduction for the money you put in, and you don’t pay any taxes on the money you pull out.

How they’re similar: Both types of IRAs let your money grow tax-deferred, meaning you don’t pay taxes on earnings as you earn them. And both allow for a penalty-free withdrawal of $10,000 for a first time homebuyer.

Three ways they’re different:

  1. With a traditional IRA, those earnings get taxed when you take the money out. In a Roth IRA, the earnings don’t get taxed – ever – as long as you take the withdrawals properly.
  2. You can’t touch the money in a traditional IRA without penalty until you hit IRS-dictated retirement age, currently 59½. As long as you wait five years before taking money out of your Roth IRA, you won’t have to pay any penalties – but you may have to pay taxes on some of the earnings.
  3. Once you hit age 70½ (72 once the SECURE Act kicks in), you have to take money out of your traditional IRA whether you want to or not. You never have to take money out of the Roth IRA, but your heirs must.

How can you tell which is better for you? Here’s an important deciding factor: the expected tax rate when you retire. If you expect your tax rate to be lower when you retire (which it may be due to lower taxable income), a traditional IRA makes a better choice. But if you think your tax rate will be the same or higher than it is now, a Roth IRA is the hands-down winner.

Plus, remember, Roth IRAs have the added benefit of completely tax-free income. That makes losing the current tax deduction a great deal (as long as you don't NEED the extra cash right now).

Keep in mind that all of these rules are based on the current tax law (as of December 2019), with the promise of a signed SECURE Act right around the corner.

If anything changes, we’ll talk about it here.

In a nutshell...

Feature Traditional IRA Roth IRA
Contributions Tax-deductible Taxable
Withdrawals Taxed Not taxed
Maximum contributions 2019 $6,000
$7,000 if you’re over 50
$6,000
$7,000 if you’re over 50
Contribution limits  N/A Yes, based on income
Deduction limits Depends if you can contribute to a retirement plan through your job N/A, all contributions are taxable
When can you take money out without penalty? Beginning at age 59½ Contributions: Any time

Earnings: 5 years after the first contribution is made and at/after age 59½

Earnings taxed? Tax-deferred Tax-free in most circumstances
Required minimum distributions? Yes, starting at age 70½ (age 72 once the SECURE Act takes effect) None (unless the account holder dies)

For more detailed information about Roth IRAs and taxes, click here.

For more detailed information about traditional IRAs, penalties, and taxes, click here.

Those links come with a BORING WARNING, but the information is 100% reliable.

Not sure which kind of IRA is best for you? Contact me here to set up a free consultation and we'll figure it out together.

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