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Which is Better for You: Traditional IRA or Roth IRA?

November 26, 2015  |   Tax Advice,Tax Tips   |   Tags: , , ,  

According to the Government Accountability Office (GAO), the median amount of retirement savings is about $104,000 for households with members between 55 and 64 years old, and $148,000 for households with members 65 to 74 years old. To increase savings for retirement, taxpayers can use tax-saving retirement plans such as IRAs, Roth IRAs, and 401(k). However, saving early and saving more are the keys to having a satisfactory income after retirement.
Roth-vs-traditional-IRASome taxpayers prefer a Traditional IRA, while others insist on a Roth IRA. But the question is which of these two retirement plans give you more monetary and tax benefits, as well as greater freedom over your money? Bankrate answers:
“Annual contributions to both accounts are the same in 2015 as in 2014 — up to $5,500 per person, or $6,500 for individuals who are 50 or older.

“That said, some experts say the Roth IRA may be the better choice for most individuals because it offers potentially greater tax breaks and more flexibility in terms of funding and withdrawing funds.

“‘I do like the Roth over the traditional IRA for a number of reasons,’ says Rick Meigs, president of 401kHelpCenter.com. ‘I like the concept of having your money tax-free forever. In a Roth IRA, you don’t have to take mandatory withdrawals at 70 1/2 and you can keep contributing to it.’

“Roth IRA contributions are funded with after-tax earnings. However, earnings grow tax-free and can be withdrawn tax-free, too, as long as the account is open for five years and you’re age 59 1/2 or older.

“Meigs notes that Roth earnings never have to be withdrawn, and you can contribute to a Roth for as long as you like. That’s a great help for those who plan to work well past traditional retirement years. On the other hand, withdraw earnings before 59 1/2 and you’ll generally pay a 10 percent penalty.


“However, you may earn too much to fund a Roth, because they’re available only to individuals whose modified adjusted gross income doesn’t exceed a maximum of $131,000 in 2015. For married couples filing a joint tax return, eligibility requirements top out at $193,000.
“If your income disqualifies you from funding a Roth, consider the traditional IRA, which offers its own set of perks.


“With a traditional IRA, you may be able to claim a full income-tax deduction for your contributions, as long as you don’t have access to a retirement plan at work, such as a 401(k). Single filers who do have access to such a plan can take a full deduction if they earn $61,000 or less, or a partial deduction up to $71,000 in 2015. The income limits are trickier for married couples filing jointly. If you have access to a plan, the limits are $98,000 to $118,000; if your spouse has access to a plan but you do not, the limits are $183,000 to $193,000 for joint filers. Remember: If your employer does not offer a retirement plan, you can get the full tax deduction for traditional IRA contributions regardless of your income.

“Even if you can’t claim any tax breaks from your traditional IRA, you can make nondeductible contributions to a traditional IRA. And, since 2010, you have the option to convert a traditional IRA to a Roth IRA, regardless of your income.

“Either way, the traditional IRA lets earnings grow tax-deferred, so you postpone paying income taxes until assets are taken out of the account. That has to begin by the time you’re 70 1/2 or you’ll face penalties for not taking so-called required minimum distributions. That’s also the age when you’re prohibited from making additional contributions to the traditional IRA.”