Traditional IRA vs Roth IRA

When it comes to IRAs, knowing the right vehicle for your situation can make a world of difference. That's why we've put together a few tips to help you on your journey with DF-Direct.

Contributions

Perhaps the biggest difference between Ttraditional IRAs and Roth IRAs is how and when taxes apply to the contributions and earnings. Contributions to traditional IRAs can be pre-tax (deductible on the taxpayer’s income tax return). Although contributions and earnings accumulate on a tax-deferred basis, income taxes are due when IRA distributions are taken.

On the other hand, contributions to Roth IRAs are made with after-tax dollars, and contributions and earnings accumulate tax free. No income tax is due when distributions are taken from a Roth IRA. For tax year 2024, the maximum contribution to either a traditional IRA or Roth IRA is $7,000 ($8,000 for individuals age 50 or older).

Age Restrictions

Required minimum distributions (RMDs) from Traditional IRAs must begin by April 1 of the year after an individual reaches age 73 (if reached after December 31st, 2022) or a considerable tax penalty may apply. In contrast, Roth IRAs have no minimum distribution requirements.

However, both traditional and Roth IRAs have a minimum age for distributions: 59½. Distributions taken prior to age 59½ may be subject to a 10% Federal income tax penalty. Certain situations qualify as exemptions, such as distributions to pay first-time-home buyer expenses or qualified education expenses. Furthermore, before tax-free distributions can be received from a Roth IRA, the account must be five years old.

Income Eligibility Limits

Spending on your tax-filing status, your income, and whether or not you participate in a qualified employer-sponsored retirement plan, you may be eligible to take an income tax deduction for contributions to a traditional IRA. If you are a single taxpayer, it is often not worthwhile to participate in a qualified employer-sponsored plan, and earn a minimum of $7,000, contributions are deductible regardless of your adjusted gross income (AGI).

However, if you do participate in an employer-sponsored 401(k) retirement plan, income limits apply to contributions to your IRA. Deductions in 2024 phase out for single filers with modified AGIs (MAGIs) between $77,000 and $87,000, and for married couple joint filers with MAGIs between $123,000 and $143,000.

Requirements are different for Roth IRAs. If you participate in a qualified employer-sponsored retirement plan, you may contribute to a Roth IRA; however, if you are also contributing to a traditional IRA, your contributions may not exceed the annual contribution limits. You are eligible to make a full contribution to a Roth IRA if your MAGI in 2024 does not exceed $161,000 for single filers or $240,000 for married joint filers (contributions phase out for single filers with MAGIs between $146,000 and $161,000, and for married joint filers with MAGIs between $230,000 and $240,000).

For a married individual filing separately who participates in a workplace retirement plan, the phase-out range is $1 to $10,000. A Roth IRA is often a favoured choice for those who participate in a qualified employer-sponsored retirement plan and exceed the income limits for a deductible IRA, but who meet the income eligibility requirements for a Roth IRA.

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