Roth vs. Traditional IRA: Features and Distinctions

The primary difference between a Roth and Traditional IRA is that the funds in a traditional IRA grow tax-deferred, while the funds in a Roth IRA grow income tax-free. Contributions you make to a traditional IRA are taxed upon withdrawal. Roth IRA funds are taxable at the time of contribution, thereafter, Roth interest and capital gains are distributed income tax-free.

One popular rationale for maintaining a traditional IRA is that retired people may be in a lower tax bracket and would therefore pay less tax on withdrawals of IRA funds going out than they would tax on Roth contributions going in. Because of pension income, Social Security payments, and/or investment income, some Americans will find themselves in an equal or higher bracket after they leave their jobs. Also, present income tax rates are at an historical low—only the 1930s saw a lower individual tax rate than we’re experiencing today.

Traditional IRA account holders must take Required Minimum Distributions (RMDs) each year, beginning at age 70½. Roth IRA owners are not subject to RMDs. You can continue making contributions to a Roth IRA after age 70½ if you have taxable compensation and fall within the MAGI limits. Traditional IRA contributions are tax deductible and grow tax-deferred. Roth Contributions are not deductible but the earnings grow tax-free.

Is a Roth strategy right for you? Everyone’s situation is different and Roth rules are complicated so it is easy to make an error. That’s why it is very important that you discuss opening a Roth IRA or converting to a Roth IRA with your qualified tax professional and/or retirement distribution specialist.