Traditional vs. Roth IRA – Benefits and Drawbacks
Two of the most popular individual retirement account options are the traditional IRA and the Roth IRA. The basis of both of these plans is to provide a secure, comfortable retirement for those eligible to open and contribute to an account. Specific details about rules and restrictions are what set these two drastically apart from one another. Depending on your income, tax filing status and exact plans for the future, you may find one is significantly more beneficial for you over the other.
The contribution limits with both kinds of IRAs are the same. The current limits are $5,000 per tax year for regular contributions and $1,000 for catch-up contributions. The tax year you turn 50 is when you can utilize the extra $1,000 of catch-up. Therefore, this is not a factor is determining one account over the other. A major factor, instead, is determining your eligibility for receiving a tax deduction with a traditional IRA. Roth IRAs do not offer tax deductions, so if you do not qualify for a deduction with a traditional account, it is in your favor to choose the Roth IRA option. Your eligibility to receive a tax deduction with the traditional account is determined by a combination of your filing status and adjusted gross income. The income restrictions of a Roth account are not to determine tax breaks, but whether you can even open an account. If you make more than $166,000 and file a joint tax return, for example, you are not eligible to open a Roth account. This strict income cap does not apply to traditional IRA contributions.
As far as distribution and withdrawal are concerned, there are many more restrictions on a traditional IRA than a Roth account. Also, withdrawal from a traditional account is considered regular income and is taxed. Funds that are placed in a Roth IRA have already been taxed, so distributed funds are not additionally taxed. Roth accounts allow you to keep your funds in the IRA as long as you are alive. Then your beneficiaries must begin removing funds. Traditional IRAs on the other hand require you to begin distributing minimum funds starting when you become 70½ years old.
For many tax payers, the idea of getting a tax break is what causes them to turn to the traditional IRA option. However, keep in mind that you are only postponing paying those taxes when you reach retirement age and begin withdrawing funds. Be sure to consult with a financial advisor before you make your decision.
At age 36, I went back to school, 2nd degree. I withdrew 4,500 out of my roth IRA afte it was in since 2002- (seven years) my tax person tells me it is coming up as taxable? I am waiting for a 1099-R form in the mail from the company (edward jones) to show my original contribtion of 5,000 back in 2002.
Is this taxable? I have already paid the tax on a roth IRA conrtibution. My finacial advisor says it’s not taxable while my tax acounted is not sure, and her computer is saying it is (for now?) at least until the 1099-r arrives Feb 15th?
What do say?
Thank you, Eric
Eric, if you paid expenses for higher education during that year, part (or all) of the distribution may not be subject to the 10% additional tax.
But if the distribution you took is considered a “non-qualified” one, it may be subject to the 10% additional tax.
Qualified education expenses include: books, tuition fees and supplies.