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Compare a Roth and traditional IRA
3:42 AM |The differences between Roth IRAs and Traditional IRAs. The Fidelity IRA Comparison Chart makes it easy to decide which option may be right for you.
Both types of IRAs offer advantages that can help you save for retirement. Which IRA you choose greatly depends on a few key factors, such as your taxes, earned income, and age.
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Both types of IRAs offer advantages that can help you save for retirement. Which IRA you choose greatly depends on a few key factors, such as your taxes, earned income, and age.
A good place to start is to decide when you want to pay income taxes on your savings.
- Roth: Pay taxes now With a Roth IRA, you make after-taxcontributions, so withdrawals aretax-free in retirement.
- Traditional: Pay taxes later With a traditional IRA, your contributions may be tax-deductible, and you'll pay taxes when you make withdrawals in retirement.
Which IRA is right for you? Let's compare
| Eligibility | ROTH IRA | TRADITIONAL IRA |
|---|---|---|
| Is there a minimum income limit? | Yes. In addition to being subject to IRS limits (see details below), the amount of your contribution can't exceed the amount of income you earned that year. This also applies to minors who want to start contributing to an IRA, with limits based on their own income, not their parents'. Also, if you're married and filing a joint tax return, a spouse who isn't working may still be able to contribute to an IRA. But thetotal contribution for both spouses can't exceed the amount of income earned by the working spouse. | Yes. In addition to being subject to IRS limits (see details below), the amount of your contribution can't exceed the amount of income you earned that year. This also applies to minors who want to start contributing to an IRA, with limits based on their own income, not their parents'. Also, if you're married and filing a joint tax return, a spouse who isn't working may still be able to contribute to an IRA. But thetotal contribution for both spouses can't exceed the amount of income earned by the working spouse. |
| Is there a maximum income limit? | Yes. Your modified adjusted gross income (MAGI) for the year may affect the amount you can contribute or—if high enough—make you ineligible. For details—including instructions on how to calculate your allowable contribution—visit irs.gov. | No. |
| Does it matter how old I am? | No. You can contribute at any age. | Yes. You must be under age 70½ to contribute. |
| Contributions | ROTH IRA | TRADITIONAL IRA |
| What's the deadline for making contributions in a given year? | Typically April 15 of the following year. | Typically April 15 of the following year. |
| How much money do I need to open a Vanguard IRA®? | $1,000 for any of the Vanguard Target Retirement Funds or for Vanguard STAR® Fund. $3,000 for most other Vanguard funds. (Some funds have higher minimum investment requirements.) | $1,000 for any of the Vanguard Target Retirement Funds or for Vanguard STAR® Fund. $3,000 for most other Vanguard funds. (Some funds have higher minimum investment requirements.) |
| What's the maximum amount I can contribute each year? | For the 2013 or 2014 tax year:
| For the 2013 or 2014 tax year:
|
| Can I deduct my contributions on my taxes? | No. |
Possibly—it depends on whether you or your spouse is already covered by a retirement plan at work.
If either of you are, the amount of your deduction, if any, will depend on your income. For details, visit irs.gov: If you are covered by a retirement plan at work If you aren't covered by a retirement plan at work |
| Withdrawals | ROTH IRA | TRADITIONAL IRA |
| Are there required minimum distributions? | No, not during your lifetime. | Yes, starting the year you reach age 70½. |
| Will I pay taxes on withdrawals? | You'll never pay taxes on withdrawals of your contributions. And you won't pay taxes on withdrawals of your earnings as long as you take them after you've reached age 59½ and owned the account for at least 5 years.* | You'll pay ordinary income tax on withdrawals of all earnings and on anycontributions you originally deducted on your taxes. |
| What's the penalty if I take a withdrawal before I reach age 59½? | There are no penalties on withdrawals of your contributions. There's a 10% federal penalty tax on withdrawals of earnings unless an exception applies.** | There's a 10% federal penalty tax on withdrawals of both contributions and earnings unless an exception applies.** |
Individual Retirement Arrangements (IRAs)
7:34 AM |An IRA is an Individual Retirement Account, and it provides either a tax-deferred or tax-free way of saving for retirement.
Definition of 'Individual Retirement Account - IRA'
An investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.
SEPs and SIMPLEs are retirement plans established by employers. Individual participant contributions are made to SEP IRAs and SIMPLE IRAs.
Also referred to as "individual retirement arrangements." Investopedia Says Investopedia explains 'Individual Retirement Account - IRA'
With the exception of Roth IRAs, where eligible distributions are tax-free, eventual withdrawal from an IRA is taxed as income; including the capital gains. Because income is likely to be lower after retirement, the tax rate may be lower. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending on income, an individual may be able to fit into a lower tax bracket with tax-deductible contributions during his or her working years while still enjoying a low tax bracket during retirement.
Read more…
Definition of 'Individual Retirement Account - IRA'
An investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.
SEPs and SIMPLEs are retirement plans established by employers. Individual participant contributions are made to SEP IRAs and SIMPLE IRAs.
Also referred to as "individual retirement arrangements." Investopedia Says Investopedia explains 'Individual Retirement Account - IRA'
With the exception of Roth IRAs, where eligible distributions are tax-free, eventual withdrawal from an IRA is taxed as income; including the capital gains. Because income is likely to be lower after retirement, the tax rate may be lower. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending on income, an individual may be able to fit into a lower tax bracket with tax-deductible contributions during his or her working years while still enjoying a low tax bracket during retirement.
