ROTH VS TRADITIONAL IRA
ROTH VS TRADITIONAL IRA: Trying to decide which retirement savings account has the best features for you? Here’s an overview to help you choose between a Roth or Traditional IRA.
TAX BENEFITS
Roth IRA: Tax-free growth | Tax-free qualified withdrawals
Traditional IRA: Tax-deferred growth | Contributions may be tax-deductible
AGE ELIGIBILITY
Roth IRA: Any age with earned income
Traditional IRA: Any age with earned income
INCOME LIMIT ELIGIBILITY
Roth IRA:
2021 Single: $125,000 to $140,000
2021 Joint: $198,000 to $208,000
2022 Single: $129,000 to $144,000
2022 Joint: $204,000 to $214,000
Traditional IRA:
No income limits to make contributions, unless you are an active participant in an employer sponsored plan.
TAXATION AT WITHDRAWAL
Roth IRA: Contributions – Never | Earnings – Tax-free after 5-year aging requirement plus other qualifications
Traditional IRA: Yes
POTENTIAL PENALTIES AT WITHDRAWAL
Roth IRA: Non-qualified distribution – taxation of earnings +10% tax
Traditional IRA: If before 59½: 10% early withdrawal penalty
REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
Roth IRA: Original owner – none
Traditional IRA: Date that you turn 70½ (72 if you reach the age of 70 ½ after 12-31-2019)
Know the limits!
CONTRIBUTION LIMITS FOR TAX YEARS 2021 AND 2022:
The maximum amount you can contribute to an IRA is $6,000 if you’re younger than age 50.Workers age 50 and older can add an extra $1,000 per year as a “catch-up” contribution, bringing the maximum IRA contribution to$7,000. This contribution limit applies to all your IRAs combined, so if you have both a traditional IRA and a Roth IRA, your total contributions for all accounts combined can’t total more than $6,000 (or $7,000 for those age 50 and up).
The deadline to make contributions to an IRA for a tax year is typically April 15 (Tax Day) of the following year unless it falls on a weekend or holiday. Tax Day is the day on which individual income tax returns are due to be submitted to the federal government. The federal government may set a different deadline for certain states so make sure to verify with your tax professional to be certain.
Bonus, using your IRA for a home purchase!
TRADITIONAL IRA
If you qualify as a first-time homebuyer, you can withdraw up to$10,000 from your traditional IRA and use the money to buy, build, or rebuild a home. Even though you’ll avoid the 10% early withdrawal penalty on the money, you’ll still owe income tax on any amount you withdraw.
ROTH IRA
If it’s been at least five years since you made your first Roth IRA contribution you can pull out up to$10,000 in investment earnings tax and penalty-free to put toward your first home. The five-year clock starts Jan. 1 of the year you made your first Roth IRA contribution. If you’re feeling generous, the IRS says you can also put this money toward the first-time home purchase of your child, grandchild or parents.
For FAQs regarding retirement plans, visit the IRS website at: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras
Please consult your tax professional for more information. Tax professionals can advise you now and all year round on the best strategies to make smart tax-saving decisions.
