How is a Traditional IRA
different from a Roth IRA? Comparison Chart, Questions and Answers (July 29th, 2009)
Comparison Video -
Roth vs Traditional IRA
What
should I be doing in terms of retirement savings, I'm already matching
my 401(k)
up to the max, should I be in an IRA, Roth or a traditional IRA?
It is a little bit confusing, there is really 2 types of investment
vehicles outside of the employer's sponsored plan, there's the traditional
IRA and the Roth.The primary difference is that in a Roth, you
can take the money out anytime without a tax penalty. In a traditional
IRA, once you put the money in, it's there till you're 59 and 1/2;
you could withdraw for hardship purposes but you will have to pay
a 10% pre-mature withdrawal penalty by the Internal Revenue Service.
The other thing is both of them will grow tax-deferred, in fact
your investments will accumulate without the government taxing you,
however with a traditional IRA, you may get a tax deduction depending
on your income level. And likewise, depending on your income level,
you may not be able to participate in a Roth.
Answer
Question
Traditional IRA
Roth IRA
Is there an age
limit when I contribute to this IRA?
Yes, you must be less than 70
and ½ years of age to contribute to a traditional IRA.
No, you can be of any age to
contribute to a Roth IRA.
If I earned more
than $5,000 in 2008 ($6,000 if I was 50 years or older), is
there a limit on how much I can contribute to each type of IRA?
Yes there is a limit. For 2008,
you can contribute to a traditional IRA up to $5,000 or $6,000
if you are 50 years or older.
Yes there is a limit. For 2008,
you can contribute to a Roth IRA up to $5,000 or $6,000 if you
are 50 years or older.
Can I deduct from
my income tax, deductions made to each type of IRA?
Yes you can deduct contributions
to a traditional IRA, with the amount depending on your income,
tax filing status, receivership of social security benefits,
etc.
No, you cannot deduct contributions
to a Roth IRA from your income tax.
Do I have to fill
out a form if I contribute to each type of IRA?
Yes only if you make non-deductible
contributions to your traditional IRA, you must fill out Form
8606.
No you do not have to fill out
any forms for contributing to a Roth IRA.
Do I have to take
minimum required distributions (MRDs) once I reach a certain
age?
Yes you must start receiving
minimum distributions by April 1st of the year following the
year you reach 70 and ½ years.
No, if you are the original
owner of the Roth IRA, you are not required to take any minimum
distributions no matter what your age is. However, if you are
the beneficiary of a Roth IRA, you will be required to take
minimum distributions.
How are distributions
taxed?
Distributions from a traditional
IRA are taxed as ordinary income, unless you contributed to
a non-deductible IRA, then you would not be subject to taxes.
If you meet certain criteria,
distributions from a Roth IRA are not taxable.
For more information about Roth & Traditional
IRAs, you can contact the IRS toll free at the following numbers:
What
should I be doing in terms of retirement savings, I'm already matching
my