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? While we can’t give an absolute answer to specific situations in this blog, we can provide a comparison of the two kinds of accounts that should help guide your decision.
The maximum contribution to an IRA for tax-year 2012 for those under age 50 is $5,000. For those over age 50, the maximum is $6,000. Any amount below the maximum limit is acceptable. Contributions are allowed in any combination to either type of IRA. For example, an investor could contribute $3,000 to a Roth IRA and $3,000 to a Traditional IRA.
|Tax Benefits||Tax deferred growth,|
contributions may be deductible
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: $110,000-$125,000|
Joint filers: $173,000-$183,000
|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|
If you still have questions about which type of IRA is most appropriate for you, please reach out to us at [email protected].