Traditional vs. Roth IRA
Traditional IRAs, which were created in 1974, are owned by roughly 35.1 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 24.9 million households.1
Both are IRAs. And yet each is quite different.
Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the account. Distributions from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.2
For individuals covered by a retirement plan at work the deduction for a traditional IRA in 2018 is phased out for incomes between $101,000 and $121,000 for married couples filing jointly, and between $63,000 and $73,000 for single filers.
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
Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2018, contributions to a Roth IRA are phased out between $189,000 and $199,000 for married couples filing jointly and between $120,000 and $135,000 for single filers.
In addition to contribution and distribution rules, there are limits on how much can be contributed to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $5,500 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $2,000 in that same year.4
Fast Fact: Wealthy Owners. The higher your income is, the more likely you are to have an IRA. Of households with incomes of $50,000 or more—39% own traditional IRAs and 30% own Roth IRAs. Of households with $50,000 or less in income, 13% own traditional IRAs and 6% own Roth IRAs.
Source: Investment Company Institute, 2018
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 $6,500.5
If you meet the income requirements, both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: open an account.
Features of Traditional and Roth IRAs
|Traditional IRA||Roth IRA|
|Income limit for 2018 contributions||Deduction phases out for adjusted gross incomes between $101,000 and $121,000 (married filing jointly) or between $63,000 and $73,000 (single filer)||Eligibility phases out for adjusted gross incomes between $189,000 and $199,000 (married filing jointly) or between $120,000 and $135,000 (single filer)|
|Distributions required at age 70½|
Source: IRS, 2018
* Up to certain limits
** To qualify, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
1. Investment Company Institute, 2018
2. Generally, once you reach age 70½, you must begin taking required minimum distributions from a traditional IRA.
3,4,5. Internal Revenue Service, 2018. The Tax Cuts and Jobs Act of 2017 eliminated the ability to “undo” a Roth conversion.