What is the Difference Between a Traditional IRA and Roth IRA?

The Individual Retirement Account (IRA) is a great retirement savings vehicle to supplement your employer-sponsored retirement plan. But did you know there is more than one kind of IRA? Technically, there are two; a Traditional IRA and a Roth IRA. But what is the difference between the two and which is a better option?

A traditional IRA is a tax-deferred account where contributions are made pre-tax and investment earnings grow tax deferred. The account holder does not owe any taxes until the funds are withdrawn and the withdrawal is taxed as ordinary income. If the account holder is under age 59½ at the time of withdrawal, an additional 10% penalty may be owed. There is a contribution limit of $5,500 for 2016. If the account holder is age 50 or older, an additional $1,000 catch-up contribution may be made. If funds are being rolled over from another IRA or employer-sponsored plan, there is no rollover limit.

A Roth IRA is an after-tax account where contributions are made after-tax, but investment earnings have different tax treatment. If the account holder is at least age 59½ and the Roth IRA has been established for at least 5 years, the account holder may withdraw both contributions and investment earnings tax-free, regardless of the account balance. If the account holder is under age 59½ at the time of withdrawal,  contributions can be withdrawn tax-free but the investment earnings will be taxed as earned income. An additional 10% penalty on the investment earnings amount may also be owed. The same contribution limits apply to the Roth IRA.

Both the Traditional IRA and Roth IRA have advantages. Neither option is a one-size-fits-all. The ultimate goal of retirement savings is to accumulate enough wealth to live a comfortable lifestyle. Having a Traditional IRA, Roth IRA or both can certainly help you plan for your financial future.

Beneco offers both a Traditional IRA and a Roth IRA product. Contact our Participant Resource Center for more information on how to establish your own IRAs in addition to your employer-sponsored plan. Our phone number is 1-888-608-2680 and hours of operation are Monday through Friday from 7:00am to 5:00pm Mountain Standard Time. We look forward to speaking with you!

*Always consult your tax advisor for any specific tax questions or your financial advisor for financial advice.