Moneyzine
/Retirement Guides/Roth versus a Traditional IRA

Roth versus a Traditional IRA

Moneyzine Editor
Author: 
Moneyzine Editor
3 mins
November 20th, 2023
Advertiser Disclosure
Roth versus a Traditional IRA

Funding a retirement account is an important part of the financial planning process. When it comes to choosing between a Traditional and a Roth IRA, it's important to make an informed decision, since it's vital to get the optimal future income benefit from the money placed into either of these plans.

Traditional or Roth IRA

While many investors have completely switched, a Roth IRA isn't the right choice for everyone. In fact, there are some significant advantages that a Traditional IRA offers versus the Roth. At last count, we've found seven major differences between these two IRAs, which are summarized in the table below and explained in the following paragraphs.

Traditional IRA

Roth IRA

Age Limit for Contributions

Yes

No

Income Contribution Limits

No

Yes

Tax Deductions

Yes (Note 1)

No

Mandatory Distributions

Yes

No

Taxing of Distributions

Yes (Note 2)

No

IRS Form 8606 (Contributions)

Yes (Note 3)

No

IRS Form 8606 (Withdrawals)

No (Note 3)

Yes (Note 3)

  • Note 1: eligibility rules apply to deductibility.

  • Note 2: applies to the tax-deferred portion of the account.

  • Note 3: applies to all tax-deferred portions of these accounts.

Age Limit for Contributions

Income Contribution Limits

  • Traditional IRA: while there are limits on how much an individual can contribute, there is no income threshold that determines eligibility to contribute.

  • Roth IRA: depending on the tax filing status, individuals earning too much money, may not be eligible to contribute.

Deductions from Federal Taxes

  • Traditional IRA: there is a good possibility that deposits are tax deductible. There are certain eligibility rules that depend on income, tax filing status, receipt of Social Security benefits, or if a retirement account is offered at work.

  • Roth IRA: tax deductions are not allowed with these plans.

Mandatory Distributions

  • Traditional IRA: there are required minimum distributionsstarting at age 70 1/2.

  • Roth IRA: owners are never forced to take a distribution from their account.

Taxing of Distributions

  • Traditional IRA: the tax-deferred portion of a distribution is taxed just like ordinary income.

  • Roth IRA: in general, federal income taxes are not due on distributions.

IRS Forms for Contributions and Withdrawals

We mentioned that there are a total of seven differences, but we've only explained five so far. That's because the final two differences have to do with filing paperwork with the IRS.

Individuals making a non-deductible contribution to a Traditional IRA need to file Form 8606. Since Roth IRAs are always non-deductible, taxpayers never have to fill out a Form 8606 when making a contribution to their account.

When making a withdrawal, or taking a distribution from a Roth IRA, filing Form 8606 is required. Filing Form 8606 is only required for non-deductible contributions made to a Traditional IRA.

Choosing Between a Roth and Traditional IRA

The above information should help taxpayers make a more informed choice when deciding between a Roth and Traditional IRA. We've described seven differences between these two plans, and the outcome is pretty evenly divided between the two.

The choice is clearly a personal one, and depends on several factors such as income levels and age. Individuals that wish to quantify some of the financial differences between these two accounts can try our Roth vs. Traditional Funds Calculator.

Additional Resources

  • Formerly known as Education IRAs, the Coverdell Education Savings Account can be an excellent way to save for college. While they cannot rival 529 plans in terms of contributions, under certain conditions they can offer more flexibility.
    Moneyzine Editor
    Moneyzine Editor
    October 4th, 2023
  • Keogh Retirement Plans in 2020 and 2021
    Keogh plans allow self-employed individuals, or small businesses, the opportunity to provide employees with retirement savings benefits. Keogh plans are sometimes referred to as qualified plans, or HR10 plans, and their rules are quite different from those that apply to Individual Retirement Accounts (IRA).
    Moneyzine Editor
    Moneyzine Editor
    November 20th, 2023
  • 457 Plans in 2020 and 2021
    A 457 plan is a retirement or pension plan that provides benefits to government employees as well as employees of tax-exempt organizations. Employees participating in 457 plans are allowed to defer their compensation on a before-tax basis through regular payroll deductions. Money placed in these accounts grows on a federally tax-free basis until withdrawn.
    Moneyzine Editor
    Moneyzine Editor
    November 20th, 2023
  • 457(f) Plans
    The 457(f) is a deferred compensation plan that allows eligible employers to contribute money on a pre-tax basis into investments that provide key executives with a retirement benefit. By doing so, these companies can help their executives defer payment of federal and state income tax on the money contributed into their accounts.
    Moneyzine Editor
    Moneyzine Editor
    November 20th, 2023
  • Minimum Required Distributions (MRD)
    In this article, we're going to discuss minimum required distributions, or MRDs. For certain retirement accounts, including the 401(k), 403(b), and the Traditional IRA, minimum distributions are required. Here we'll discuss the calculation of this distribution, and the exact MRD rules to follow.
    Moneyzine Editor
    Moneyzine Editor
    November 20th, 2023
  • Investing in a retirement account isn't a onetime decision. It's more like a process. At a single point in time, a decision is made to invest money in a certain way, but as time moves forward, balancing that retirement account becomes important too.
    Moneyzine Editor
    Moneyzine Editor
    October 4th, 2023
  • A comprehensive retirement plan will have a mix of employer benefits, government plans, and retirement savings accounts. There are also many "rules of thumb" that prescribe how much income is needed once retired. From a practical standpoint, retirement income needs to last a lifetime, which might be longer than most people think. In this article, we're going to first start out by talking a little bit about life expectancy, and separate some of the fact from fiction. Next, we'll talk about retirement income, in depth, including how to go about calculating how much money is needed. We'll also talk about...
    Moneyzine Editor
    Moneyzine Editor
    October 4th, 2023

Contributors

Moneyzine 2024. All Rights Reserved.