IRA stands for Individual Retirement Account. Simply put, an IRA is a savings account with tax benefits that allows you to put away money for retirement. According to research from the Investment Company Institute, 43.9 million U.S. households own at least one type of IRA. 35% of households contributed to traditional IRAs, while 36% contributed to Roth IRAs, and 20% contributed to more than one type of IRA. So statistically, there doesn’t seem to be a huge difference. But what makes the two different?
What is a Traditional IRA?
A traditional IRA allows you to direct pre-tax income toward investments that can grow tax-deferred until your retirement.
What is a Roth IRA?
With a Roth IRA, you typically pay taxes when you put the money away in order to withdraw it tax-free once you retire.
The Difference Between Traditional and Roth IRA
There are a few main differences between a Traditional IRA and a Roth IRA, summarized in the table below. Contributions to a Traditional IRA are tax deductible the year in which they are made, whereas Roth IRA contributions are not tax-deductible. For a traditional IRA, you cannot contribute after age 70 ½ and distribution is required at that age, while there are no age requirements associated with a Roth IRA. Traditional IRA earnings are taxed at withdrawal, whereas Roth IRA withdrawals are not taxed, barring any penalties.
||Tax- deductible in year made
||Cannot contribute after age 70 1/2
||Can contribute at any age
||Taxed like income at withdrawal
||Generally tax free at withdrawal
||No income limit
||Income must be below certain limits
||Required at age 70 1/2
||No requirement at any time throughout your life
Income Limits on IRA’s
Additionally, contribution to a Traditional IRA has no income limit, which is not the case for a Roth IRA. With a Roth IRA, the amount you can contribute is limited based on your filing status and income level. See the Roth IRA contribution limits for 2020 here.
Save for Retirement with Citizens Bank
Citizens Bank is here to help you plan for your financial future. We can help you not only decide which type of IRA is right for your financial situation but advise on how much you should be contributing to live the lifestyle you envision when you retire. Everyone’s road map to retirement looks different, so choose a local community bank that sees you as more than just a number.