6 Major Differences Between Roth and Traditional IRAs
Two of the most recognized and acquired individual retirement accounts are the Roth IRA and the Traditional IRA. Though these IRAs have a single objective of providing stable retirement years for eligible contributors, there are some aspects that make them different from one another. You will only find out what are their differences and distinct components if you make a comprehensive comparison between them. To assess Roth vs. Traditional IRA, you must examine all their features and decide which one suits your needs. Let us look at the 6 major differences between Roth and Traditional IRAs.
Deciding whether to invest in a Traditional IRA or a Roth IRA can be a difficult decision, especially if you are unaware of the differences. The following are the differences;
1. The taxation of the IRAs
A Traditional IRA is an approach typically taken with an employer-sponsored plan where before-tax dollars are contributed, thus allowing the employee/investor to invest more money over the life of the IRA. However, a Traditional IRA is subject to income tax at the time of withdrawal (typically retirement).
2. The Limitations on distribution and withdrawals
In the distribution or withdrawal aspect, Traditional IRAs permit you to get your contributed money when you become 59 ½ or when the member suddenly becomes disabled or bedridden. As for the Roth IRA, the distributions can be carried out after the age of 59 ½, the account has been active and open for the last five years or the contributor becomes bedridden.
3. The tax implications of a Roth IRA and Traditional IRA.
The contributions that you will make on Roth IRA are after-tax assets. The withdrawals that you will perform later on will not incur taxes, under specific guidelines and stipulations set by the law. When it comes to the Traditional IRAs, the contributed funds are tax-deductible, which reduces your tax basis for a specific tax year. Withdrawals and distributions made under the Traditional account will incur taxes, wherein the tax deductibility is limited by the MAGI or Modified Annual Gross Income and contributions for 401(k) or pension plan.
4. The Roth and Traditional investment retirement accounts on forced contributions
Roth IRA does not have forced distributions. Traditional IRAs on the other hand, have forced distributions beginning from the age of 70 ½ together with a fifty percent penalty on the least withdrawn amount. Roth IRA permits you to make distributions anytime while Traditional IRA will not allow you to carry out contribution withdrawals at any point in time.
5. Early Withdrawals
On early withdrawals, the Traditional IRA can make you incur a penalty of ten percent and auxiliary taxes if you try to perform withdrawals prior to becoming 59 ½ years of age, though there are exceptions as stipulated by some rules. Early withdrawals on Roth account, in the amount more than your made contributions plus seasoned conversions, will obtain normal income taxes and penalty of ten percent for non-qualified distributions.
6. The rules when purchasing a house
The rules of Roth vs. Traditional IRAs when purchasing a house is that the Traditional IRA gives you the opportunity to have withdrawals in the amount of $10,000 if it is your first time to buy a house. The Roth IRA can grant you a $10,000 withdrawal amount for your house down payment. This will be provided to you if you didn’t purchase another home for the last twenty-four months.