Traditional IRA:

• Contributions to a traditional IRA are typically tax-deductible, reducing your taxable income for the current year.
• Earnings within the account are tax-deferred, meaning you only pay taxes when you make withdrawals.
• Distributions in retirement are considered ordinary income and subject to taxation.

Roth IRA:

• Contributions to a Roth IRA are not tax-deductible, so they don’t reduce your current taxable income.
• Earnings within the account grow tax-free, and qualified withdrawals are also tax-free.
• Distributions, when following the rules, come with no tax liability.

Key Difference: The key difference lies in when taxes are paid. Traditional IRAs provide immediate tax benefits but require taxation upon withdrawal. In contrast, Roth IRAs do not offer tax deductions but allow for tax-free withdrawals.

Traditional IRA:

• Anyone with income can contribute to a traditional IRA, but if you are covered by a workplace retirement plan and your income exceeds a certain threshold, you may not be able to fully deduct your contributions.
• There is no age limit for contributing to a traditional IRA.
• Annual contribution limits may change and are generally lower compared to 401(k) plans.

Roth IRA:

• Roth IRAs have income limits, and you can only make full contributions if your Modified Adjusted Gross Income (MAGI) falls below a certain threshold.
• You can contribute to a Roth IRA at any age as long as you have income.
• Like traditional IRAs, Roth IRAs have annual contribution limits that may change over time.

Key Difference: While both IRA types have contribution limits, Roth IRAs have stricter income limits, while traditional IRAs do not. Roth IRAs also allow contributions at any age, making them suitable for older workers.

Traditional IRA:

• Contributions to a traditional IRA may be tax-deductible under certain criteria. The tax deduction gradually reduces as income increases.
• The deductibility of contributions depends on your income and filing status if you or your spouse participate in a workplace retirement plan.

Roth IRA:

• Contributions to a Roth IRA are not tax-deductible. You fund the account with after-tax dollars.
• Roth IRAs do not provide immediate tax deductions, but they offer tax-free growth and tax-free withdrawals.

Key Difference: Traditional IRAs offer conditional immediate tax benefits, while Roth IRAs do not provide tax deductions but offer tax-free growth and withdrawals.

Traditional IRA:

• Withdrawals from a traditional IRA are treated as ordinary taxable income.
• You can start penalty-free withdrawals after the age of 59 and a half, but you must start taking required minimum distributions (RMDs) at age 72.

Roth IRA:

• Qualified withdrawals from a Roth IRA are entirely tax-free.
• You can withdraw your contributions at any time without penalty or tax. To withdraw earnings tax-free, you generally need to be at least 59 and a half and have held the account for at least five years.

Key Difference: Traditional IRAs provide tax-deferred growth and taxable withdrawals, while Roth IRAs provide completely tax-free qualified withdrawals, including contributions.

Traditional IRA:

• Taking early withdrawals (before age 59 and a half) from a traditional IRA typically results in a 10% penalty in addition to taxes.

Roth IRA:

• You can withdraw your contributions from a Roth IRA at any time without penalty or tax. For early withdrawal of earnings, a 10% penalty may apply, unless you meet certain exceptions.

Key Difference: Roth IRAs offer more flexibility for early withdrawals of contributions without penalty.

Traditional IRA:

• Traditional IRAs require you to start taking RMDs at age 72, which means you must withdraw a specific minimum amount each year. These withdrawals are counted as taxable income.

Roth IRA:

• Roth IRAs have no required minimum distributions during the account owner’s lifetime. This can be a significant advantage for those who don’t need the money and want to leave it as a tax-free inheritance for heirs.

Key Difference: Roth IRAs do not have required minimum distributions during the account owner’s lifetime, allowing for continued tax-free growth and the potential for wealth transfer.

Traditional IRA:

• Inherited traditional IRAs are subject to RMDs, and distributions are usually taxable. Spouses can inherit the account and treat it as their own, while non-spouse beneficiaries have different rules.

Roth IRA:

• Inherited Roth IRAs also have RMDs for non-spouse beneficiaries but typically offer tax-free distributions. Spouses can inherit the account and continue tax-free growth.

Key Difference: Inherited Roth IRAs generally offer more tax advantages, especially for non-spouse beneficiaries.

Traditional IRA:

• Traditional IRAs provide immediate tax benefits, making them suitable for individuals seeking current tax savings.
• Suitable for those anticipating lower tax rates in retirement.

Roth IRA:

• Roth IRAs are more suitable for those expecting higher tax rates in retirement or prioritizing tax-free growth and withdrawals.
• Roth IRAs offer more flexibility for early withdrawals and have no required minimum distributions for account owners during their lifetime.

Key Difference: The choice between a traditional IRA and a Roth IRA depends on your current and future tax situations and your financial goals.

Traditional IRA:

• Inherited traditional IRAs may incur taxes upon inheritance, potentially creating a tax burden for beneficiaries.

Roth IRA:

• Inherited Roth IRAs maintain their tax-free status, providing an attractive option for estate planning and tax reduction, leaving assets with a lower tax liability to beneficiaries.

Key Difference: Roth IRAs typically offer greater tax advantages in estate planning, especially for non-spouse beneficiaries.