Tax day, April 15th, is just around the corner, but there is still time to make a prior-year IRA contribution. Which kind of IRA is right for you? Traditional or Roth?
The maximum contribution to an IRA for tax-year 2015 for those under age 50 is $5,500. For those over age 50, the maximum is $6,500. Any amount below the maximum limit is acceptable. Contributions are allowed in any combination to either type of IRA. For example, an investor over age 50 could contribute $3,000 to a Roth IRA and $3,500 to a Traditional IRA.
| Traditional | Roth | |
| Tax Benefits | Tax deferred growth, contributions may be deductible | Tax-free growth, tax-free qualified withdrawals* |
| Age Limits for Contributions | Under age 70 ½ with earned income | Any age with earned income |
| Phase-out of Contribution Eligibility due to Income | Contributions can be made at any income level (deductibility is affected by income) | Single filers: $116,000-$131,000 Joint filers: $183,000-$193,000 |
| Phase-out for Deducting Contributions due to Income | Single filers: $58,000-$68,000 Joint filers: $92,000-$112,000 If no retirement plan is offered through employment, income limits do not apply. | Contributions are not deductible |
| Taxation at Withdrawal | If contributions were deductible, withdrawals are taxed as ordinary income. If contributions were not deductible, only growth is taxed as ordinary income | Earnings are tax-free if withdrawals are made 5 years after the initial contribution and the IRA owner is age 59 ½ or older. |
| Withdrawal Penalties Prior to Age 59 ½ | If contributions were deductible, 10% penalty and ordinary income taxes due on total distribution. | On growth only, 10% penalty and ordinary income taxes due. Contributions (basis) are not subject to penalty or taxes. |
| Required Minimum Distributions | Start at 70 ½ | None |
If you have questions about which type of IRA is most appropriate for you, please reach out to us at [email protected]
*Roth earnings are federally tax-free after 5 years. Withdrawals prior to 59 ½ are subject to 10% penalty on growth except in cases of death, disability, or qualified first-time home purchase.
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