Differences Between a Traditional IRA and Roth IRA

Saving for retirement does not have to be scary thing. As with anything else, the more familiar you get with something, the less intimidated you will be by it. Investing for your future is actually not as complicated as you might think.

One of the easiest ways to start saving for retirement is by contributing to your company’s 401k. This is especially important if your employer matches your contributions up to a certain amount.

But what if your job doesn’t offer a 401k? Or what if you do not work? (Check out this post on spousal IRAs.) Maybe you can consider an Individual Retirement Account (IRA).

There are several types of IRAs, with the Traditional IRA and Roth IRA being the two that many people have as a part of their retirement portfolio. You can either choose one or the other, or have both. Keep reading for the differences between a Traditional IRA and Roth IRA.

I had planned on listing out the differences and similarities of the Traditional IRA and Roth IRA, but I found a great chart summing everything up at Fidelity. If this is overwhelming, scroll down for my quick summary of the two types of accounts.

Traditional IRA & Roth IRA – Differences

Image courtesy of Fidelity.

Traditional IRA & Roth IRA – Similarities

Image courtesy of Fidelity.

Phew! That was a lot of information. If this is all new to you, don’t worry. You can always refer back to the charts if you need a refresher.

To Summarize…

1. Roth IRA earnings grow tax-free.
2. Traditional IRA earnings grow tax-deferred, meaning you don’t pay any taxes until you start making withdrawals.
3. Contributions to a Roth IRA are not tax-deductible.
4. Contributions to a Traditional IRA may be tax-deductible. Depending on how much you make, and whether you are covered by a retirement plan at work, you may be able to take a full, partial, or no deduction. Check out the rules here.
5. Depending on your income, you may be limited as to how much (if any) you can contribute to a Roth IRA.
6. Regardless of your income, you can contribute to a Traditional IRA. The income limits only apply to which portion of your contribution is tax-deductible.

As I said at the beginning of this post, you are allowed to have both types of accounts. However, if your contribution limit is $5500, the total of both your accounts cannot exceed that.

Start contributing today! Even if you don’t have $5500 to max out your account right now, put in whatever you can. Your future self will thank you.