This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Traditional IRAs vs. Roth IRAs: Which is better for taxes?

The federal government uses tax policy to encourage people to save money. You can use those incentives to your advantage, but it is also important to understand that they typically come with strings attached.

Traditional and Roth IRAs have different tax advantages, and are subject to different limitations. Here are some of the key tax features of each type of account.

Traditional IRAs

A traditional IRA carries two forms of tax advantage: There is an immediate tax deduction when you contribute money, and any investment earnings, including interest and gains, are not taxed for as long as they are in the account. However, there are limitations. You can only deduct contributions up to $5,500 per year (or $6,500 if you are age 50 or older) and there is a 10 percent penalty if you take money out of a traditional IRA before you are age 59 1/2.

Also, the amount you can deduct may be even more limited if you are a high earner or if you are covered by a retirement plan at work. Beyond those limitations, what can be easy to overlook about the initial tax advantages of traditional IRAs over Roth IRAs is that they are essentially temporary. When you eventually withdraw money from a traditional IRA, it is taxed as ordinary income, and you are required to begin withdrawing money from an IRA once you reach age 70 1/2.

So, a traditional IRA does not eliminate taxes on your contributions and your investment earnings, but it does put them off. The premise is that people are likely to be in a higher tax bracket in their peak earning years, so an IRA allows them to put off taxation until retirement, when their income will be more limited and thus place them in a lower tax bracket. However, given the uncertainty of changes in tax rates, that benefit is by no means certain.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs