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The two most common types of IRAs are the traditional IRA and Roth IRA.
Your contributions to a traditional IRA enjoy tax-advantaged growth potential. You do not have to pay taxes on your traditional IRA assets until you withdraw the amounts.1 You may be able to make tax-deductible contributions to a traditional IRA. The deductibility is subject to limitations based on your eligibility to participate in an employer-sponsored retirement plan, your income, and your filing status. You cannot contribute to a traditional IRA if you are over age 70½.
You cannot deduct any contributions made to a Roth IRA. Contributions to a Roth IRA are always made with after-tax dollars and are subject to income limitations. Your contributions to a Roth IRA enjoy tax-advantaged growth potential. You also may take distributions from a Roth IRA account tax-free if you've been invested in the Roth IRA for a minimum of five years and if a distribution is made after the date you reach age 59½, or because you are disabled, or if it's made to a beneficiary or to your estate after your death. There are no required minimum distributions if you are the owner of a Roth IRA.
How are a traditional IRA and a Roth IRA different?
|Question||Traditional IRA||Roth IRA|
|Is there an age limit on when I can set up the IRA and contribute?||Yes. You must not have reached age 70½ by the end of the year.||No. You can be any age.|
|Can I deduct contributions?||Yes. You may be able to deduct your contributions to a traditional IRA depending on your income, your filing status, whether you are covered by a retirement plan at work, and whether you receive Social Security benefits.||No. You can never deduct contributions to a Roth IRA.|
|Do I have to start taking distributions when I reach a certain age?||Yes. You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 70½.||No. If you are the original owner of a Roth IRA, you do not have to take distributions regardless of your age.|
|What are the tax advantages?||Tax-deferred growth potential.||Tax-free growth potential. No required minimum distributions.|
|Are distributions from my account taxable?||Distributions are taxed as ordinary income, but if you made nondeductible contributions, not all of the distribution is taxable. A 10% early withdrawal penalty may apply to withdrawals made prior to age 59½.||
Distributions are not taxed as long as certain requirements are met: (1) You must have been invested in the Roth IRA for a minimum of five years, and (2) A distribution is made either:
If a distribution does not meet the requirements listed above, the portion of the distribution attributable to earnings may be subject to ordinary income tax and may be subject to the 10% early withdrawal penalty.
|Can I take a loan?||No.||No.|
|Is there an upper income limit on how much I can earn and still contribute?||No.||Yes. The income limits are based on your modified adjusted gross income. You cannot contribute to a Roth IRA if your 2015 income is more than $131,000 for single and head of household filers and $193,000 for joint filers.|
|What are the contribution limits for 2015?||
|Is my account subject to Required Minimum Distribution rules?||Yes.||No, for a Roth IRA owner.|
Source: IRS Publication 590
You may contribute to both a traditional IRA and a Roth IRA in the same year. However, the total of your contributions in 2015 to a Roth IRA and a traditional IRA may not exceed $5,500 if you are under 50 years old and $6,500 if you are age 50 or older. Also, your contribution limit to a traditional IRA will be reduced by the contributions made to a Roth IRA. For more information, see IRS Publication 590.
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1Withdrawals are subject to ordinary income tax. A 10% early withdrawal penalty may apply to withdrawals made prior to age 59½.