Broker Check

What are the Differences Between a Roth IRA and Traditional IRA?

March 16, 2017

When it comes to planning for retirement there are a variety of ways that you can go about saving. If your employer offers a retirement plan and match, you should definitely take advantage of this opportunity. While becoming less common, some employers still offer pensions, which offer a guaranteed payout at retirement. However, if you don’t have the option of retirement through your work, you’re not without options. At Dunncreek Advisors, we often will recommend that our clients invest in a Roth IRA or Traditional IRA depending on their circumstances. In this blog we’ll explain the differences between the two so that you can decide which one may work best for you.

Income Limits Could Affect Which Option You Choose

Anyone who is 70 ½ or younger, and has earned income is qualified to contribute to a traditional IRA. Roth IRAs, on the other hand, have certain income restrictions:
Single individuals – Must have an adjusted gross income of less than $132,000 in 2016 to be eligible to invest in a Roth IRA.
Married individuals – Married couples who are filing their taxes jointly and have modified adjusted gross incomes of $194,000 or less in 2016 are eligible to invest in a Roth IRA. Contribution limits begin to be phased out at $184,000.

What About Taxes?

Both Roth IRAs and Traditional IRAs have tax benefits, but deciding which IRA will work best for you depends on whether you think your tax rate when you reach retirement will be higher or lower than what you’re currently paying. With a Roth IRA you’re investing after-tax dollars at your current tax rate, but can withdraw in retirement completely tax free. Whereas with a traditional IRA, you don’t pay taxes now, but will pay when you withdraw at whatever tax rate, based on your income level in retirement. It can be tricky to predict both what your tax rate will be in several decades as well as federal and state tax rates.

Differences in Withdrawals

One important difference between the two types of IRAs has to do with when money can be withdrawn from the retirement account. Traditional IRAs force you to start taking distributions at age 70 1/2, while Roth IRAs don’t force withdrawals at any time during the life of the account owner. So, if you are in a position in retirement where you don’t need to withdraw the money, Roth IRAs can grow tax free and are often looked at as ideal vehicles for wealth transfer.

Questions About Roth IRAs and Traditional IRAs?

While we attempted to cover a large amount of information related to traditional IRAs and roth IRAs, we understand that deciding which to choose can be difficult. Give Dunncreek Advisors a call today if you’d like to look deeper into which retirement vehicle may make the most sense for you and your family. Please keep in mind that Dunncreek Advisors does not provide legal or tax advice.