What's The Difference? Roth IRA vs Traditional IRA

Oct 26

Introduction

If you're looking to save for retirement, an IRA can help you reach your goals. An IRA is a way for investors to put money aside for retirement by using various types of investment accounts. There are two main types of IRAs: traditional IRAs and Roth IRAs. Both have their own advantages and disadvantages, but each also has similarities that can make choosing between the two difficult. In this article, we'll compare the differences between these two types of accounts so you can make an informed decision about which one best fits your needs!

Must you take RMDs with a Roth IRA?

The short answer is no, you don't have to take RMDs with a Roth IRA.

However, if you are single and are 70½ or older at the end of the year in which you make your first contribution to a Roth IRA (or any other tax-advantaged retirement plan), then you must take that required minimum distribution from your traditional IRAs by April 1st of the next calendar year.

That said, there are several factors that may affect when your first RMD should be taken from either type of IRA:

Can you contribute to a Roth IRA after age 70½?

Can I contribute to a Roth IRA after age 70½?

Yes, you can still contribute to your IRA for 2022 up until April 15th, 2023.

You can still contribute to the same types of IRAs at any age including:

Traditional IRA (Not available for first-time contributions after age 70 ½)
Roth IRA (Allowed after turning 18 years old)

How much can I contribute? If you’re over 50 years old, it’s possible to make an additional “catch-up" contribution of $7,500 per year.

Can you have both a Traditional and a Roth IRA?

You can have both a traditional IRA and a Roth IRA, but you can't contribute to both at the same time. If you want to max out your retirement savings for the year, which is something we highly recommend, then it's best not to open a second account until after your first one has had its maximum contribution adjusted for any contributions made in prior years.

The amount you're able to contribute will depend on your income level: if you earn less than $64k per year (single filer), or $103k (married filing jointly) then there are no limits on how much money you can invest in either type of account. If your income exceeds these thresholds, however, there are limits imposed by the IRS on how much money each type of account can hold—but even if those limits weren't there, it'd still be difficult or impossible for most people to put away more than $15k per year total into retirement accounts anyway—so don't worry too much about hitting those ceilings!

What's the difference between a Traditional IRA and a Roth IRA?

A traditional IRA is an account that allows you to save for retirement with pre-tax dollars. You can invest in a variety of stocks and bonds, making it easy to diversify your portfolio. The money you contribute to a traditional IRA account is deducted from your taxable income, meaning you'll pay less in taxes now and more later when it comes time to withdraw the funds.

In contrast, Roth IRAs allow you to contribute with post-tax dollars (meaning they're made with money that has already been taxed). Withdrawals are also tax-free as long as certain conditions are met:

You have had an account open for at least five years; or
You are 59½ years old or older; or
It's being used for buying your first home (up to $10,000).

When can you withdraw funds from your Roth IRA without paying any income tax or penalties?

Here's a quick rundown of the different rules for when you can withdraw funds from your Roth IRA:

After age 59 1/2, you may make withdrawals from your Roth IRA at any time, since there is no required minimum distribution (RMD) policy for this type of account. There are no early withdrawal penalties or taxes due on these withdrawals, either.
After five years from the year in which you first deposited money into a Roth IRA, you may also make withdrawals without tax implications or penalties. This means that if you've had a Roth IRA account since 2009 and haven't taken out any money yet, then starting in 2014—the year after your fifth anniversary—you'll be able to pull out some cash without paying taxes on it.
If you’re at least 59 ½ years old by December 31st of the year in which an inherited traditional IRA becomes payable to beneficiaries under its terms (for example, upon death), then you can take distributions without penalty under certain circumstances; however these distributions must be reported as income on Form 1040 Line 15b!

What are the contributions limits for IRAs in 2022?

For the sake of simplicity, we'll focus on the standard IRA contributions. A traditional IRA's contribution limit is $6,500 annually in 2022 ($7,500 if you're age 50 or older). If you have a Roth IRA and make your contributions with after-tax dollars, the contribution limit is $6,500 annually (or $7,500 if you're age 50 or older) as well.

If you're eligible for both types of IRAs and prefer to split your contributions between them—for example: put half into one account and half into another—you may do so without penalty (but not without tax). For example: If an individual contributed $4,000 toward their traditional IRA but also made a non-deductible contribution toward their Roth IRA for another $2,500 in 2022 ($6K total), then they will have reached their combined maximum allowable amount of $6,500 ($7,500 if they are over 50). However! This person would only be able to deduct any money they put into either type during that year; they cannot claim both as deductions on their taxes.

You can still contribute to your IRA for 2022 up until April 15th, 2023.

You can contribute up to $6,500 per year if you're under 50 years old and up to $7,500 if you're 50 or older.

Contributions made in 2023 count towards your 2022 contribution limit as long as they were deposited by April 15th, 2022 (or earlier). If you are over 59½ years old at the end of the year, then you won't have any income tax liability this year on your withdrawal because there is no income tax applied to any withdrawals before age 60 1/2 years old!

Conclusion

So, what's the difference between a traditional IRA and a Roth IRA? Well, first of all, you can contribute to both types of accounts. The main difference is that with a Traditional IRA account, you'll have to pay income taxes on the money you put into it when you withdraw it later in life. With a Roth IRA though, those contributions will never be taxed when they're withdrawn from your account years down the road (provided certain rules are followed). Which type of account makes more sense for your situation depends on many factors including how much money comes out annually over time; what type of investments or assets are being held within them; and how much taxable income someone earns during their working years as well.

Zach Pasquariello