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First National Bank of Durango

Traditional Vs Roth IRA

Individual Retirement Accounts can be part of the foundation of a financially secure retirement. For many years, millions of individuals have made annual contributions to IRAs or used them to receive distributions from retirement plans on changing jobs or retiring. In 1997, a new form of IRA was created called the Roth IRA. The Roth IRA offers some advantages over the Traditional IRA but comes with some limitations.

Here is a comparison of some of the key features of each.

Anyone under the age of 70 ½ with earned income can contribute to a Traditional IRA. For a Roth IRA, you must have earned income but there is no age restriction. However, there are income limits for Roth IRAs. In 2018, single tax return filers can make full contributions if their income is less than $120,000. The limit for joint filers is $189,000. Partial contributions are allowed if your income exceeds those amounts (up to $135,000 and $199,000 respectively).

Taxability of Earnings
Earnings on funds in a Traditional IRA are tax deferred. Roth IRAs provide for tax-free growth.

Contribution Limits
The contribution limits for both types of IRAs are the same. In all cases, contributions must not exceed earned income.

2017 contribution limit: $5,500
2018 contributions limit: $5,500

In addition, workers ages 50 and over can make additional “catch-up” contributions of  $1,000 per year.

Deductibility of Contributions
Contributions to Traditional IRAs are deductible if you do not participate in another qualified plan. If you are a plan participant, contributions may be deductible depending on your adjusted gross income (AGI).

2018 contributions: Full deductibility for single return filers if AGI is $63,000 or less and partial deductibility with AGI up to $73,000. For joint return filers, the limits are $101,000 and $121,000.

Contributions to a Roth IRA are not tax deductible.

Taxability of Withdrawals
For Traditional IRAs, any earnings and deductible contributions are subject to tax on withdrawal. All distributions from a Roth IRA are tax-free.

Penalty for Early Withdrawals
The IRS imposes a 10% early withdrawal penalty tax on distributions taken before reaching age 59 ½. There are a few exceptions for death, severe hardship and other situations. A bank penalty may apply for a withdrawal from CDs that have not matured.

Mandatory Distributions For a Traditional IRA, you must start taking distributions in the year you reach age 70 ½. There are no required distributions for the Roth IRA.

* See your tax advisor for more details.