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Traditional IRA vs. Roth IRA

Details
Category: TAX : General

Both Traditional (Individual Retirement Account) IRA and Roth IRA are good for retirement. Both plans allow you to save money for the future. There are other types of IRA accounts with different rules and benefits.  Generally, you hear traditional IRA and Roth IRA.  It is very important to understand differences between these two IRA accounts.

For more information follow IRS Url

 

Roth IRA

 

Traditional IRA

Contribution

A Roth IRA allows you to make after-tax contributions. Best suited for: An individual who expects to be in a higher tax bracket when he or she starts taking withdrawals

 

A Traditional IRA may allow you to make pre-tax contributions. Best suited for: An individual who expects to be in the same or lower tax bracket when
he or she starts taking withdrawals

Taxability

Contributions grow: Tax-free
Tax-deductibility: No, gives you no current-year tax benefits

 

Contributions grow: Tax-deferred
Tax-deductibility: Yes, gives you immediate tax benefits (subject to income limitations for participants in employer-sponsored plans

Contribution Amount

Contributions come from: After-tax dollars
Max contribution: see below
Contribution eligibility: See below

Contribution age restriction: None

 

Contributions come from: Pre- or after-tax dollars
Max contribution: See below Contribution eligibility: See below

Contribution age restriction: None

Penalty

Penalty- and tax-free after 5 years and age 59 1/2
Mandatory distributions: None

 

Penalties: Penalty-free but taxed as current income after age 59 1/2
Mandatory distributions: After age 72

 

Key Notes

  • The combined annual contribution limit for Roth and traditional IRAs is subject to below limit.
  • Roth IRA contribution limits are reduced or eliminated at higher incomes.
  • Traditional IRA contributions are deductible, but the amount you can deduct may be reduced or eliminated if you or your spouse is covered by a retirement plan at work.
  • Lower-income taxpayers may be eligible for the "saver's credit" if they contribute to an IRA.

 

What are contribution and deduction limits of Traditional and Roth IRA?

Refer various limits for year 2020

 

 

 

What happened if a taxpayer contributes too much?

If you contribute too much—or contribute to a Roth when your income is too high—you'll owe a 6% penalty on the excess contribution each year until you fix the mistake.

This excess contribution is treated as ineligible / excess contribution.

There are ways to fix it, but there is a cost associated to it.

  • Withdraw the excess contribution (and any earnings on it) before the April tax deadline.
  • If you've already filed your tax return, remove the excess contribution (and earnings), and file an amended tax return by the October deadline.
  • Apply the excess to next year's contribution. You'll still pay the 6% penalty this year, but you'll be set to go forward.
  • Withdraw the excess next year by Dec. 31. You'll pay the penalty for two years and then move on.

 

IRA FAQs - Distributions (Withdrawals) Click here for IRS source..

Click to Open a IRA account with E-Trade 

Click here for IRA contribution calculator

Do you know, still you can contribute to Roth IRA even tough your income is more than the threshold limit?

Thanks, Surya Padhi. Contact Me, if you need more information.