Roth IRA vs. Traditional IRA Calculator


Traditional and Roth IRA – What’s the same

  • Contribution limits – $5,500 (age 49 and under); $6,500 age 50 older
  • Contribution deadline – Tuesday, April 17, 2018 (for the tax year)
  • Minimum investments – No minimum to open a Fidelity IRA
  • Fees – No setup or maintenance fees; no transaction fees for most Fidelity mutual funds

Traditional and Roth IRA – Understand The Differences

Roth and IRA’s both offer tax advantages that are beneficial to save for your retirement. However, the way they both go about this is completely different from one another.

Income Limits

An individual who has earned income that is 70 ½ years old and younger has the opportunity to put money towards a Traditional IRA. The contribution you put towards it that’s tax deductible depends largely on your income and whether or not your spouse (if married) is covered as well through your job such as a 401K. Click here to learn more about the details from the IRS.

Even though there aren’t age restrictions on Roth IRAs, they have income-eligibility restrictions. For instance, tax filers who are single must have an adjustable gross income that’s less than $135,000 in order to put money towards their ROTH IRA in 2018. With the modified AGI of $120,000, limits to contributions are phased out per the guidelines of the IRS.

In 2018, those who are married that file jointly have to have modified AGI’s that’s less than $199,000 to have the option to contribute to a Roth. Starting with an amount of $189,000, contribution limits are phased out.

Taxes

Furthermore, one of the biggest differences between a traditional and Roth IRA is how do you go by and when do you get a tax break:

  • A traditional IRA’s tax advantage is that the contributions are tax deductible.
  • A Roth IRA’s tax advantage is that your withdrawals in your retirement are not taxable.

Basically, when you take your distributions or don’t make withdrawals before your retirement, you have to pay taxes in regards to a traditional IRA. Roth IRAs function in reverse. With a Roth IRA, the taxes have to be paid upfront because the contributions are deductible. Your earnings are tax-free in a Roth IRA and they are tax-deferrable in a traditional IRA.

Future Tax Rates

Choosing between a Roth or Traditional IRA largely depends on how you believe your income and income tax bracket compares to your situation currently. In a nutshell, you are attempting to see whether or not the rate you pay on tax on your Roth IRA contributions will be bigger or smaller today than the rate you would pay on contributions from your Traditional IRA once retired (or have to start making them, at age 70 ½ years old).

Granted, it’s a challenge to try to determine the state and federal tax rates will look like 10-40 years from now. Due to the fact that today’s federal tax rates are low and the huge U.S. deficit, a lot of economists perceive that income tax rates are going to rise in the future. As a result, having a Roth IRA is going to be the better choice in the long run. But who knows what’s going to happen right?

In the meantime, you can evaluate your personal situation by asking yourself some simple questions: What is your current federal tax bracket? Do you know if you’re going to be in a higher or lower one when you retire? Is your amount of income going to increase or decrease? Even though they say an individual’s income declines after retirement, at times, taxable income does not. Look at it this way. You’ll be accruing plus owing taxes on Social Security payments.

Withdrawals

Are you ready to start withdrawing money from your IRA that you’ve been building up for years? Or maybe you just need to withdraw a portion to buy a house or to hold you over until you get a new job. It’s important to know the following withdrawal restrictions.

  • You have to be at least 59.5 of age in order to make withdrawals of your contributions from a Traditional or Roth IRA.
  • You have to start withdrawing from a Traditional IRA by the age of 70.5.
  • There is not such a requirement with a Roth IRA. Furthermore, you have the option to leave your money in this type of account forever and just transfer the account to another individual before you die. Please note that beneficiaries of your Roth IRA don’t awe anything regarding income tax on withdrawals. In addition, beneficiaries can also extend their distribution for a very long time.
  • If you withdraw from a Roth IRA before the age of 59.5, you have to pay a $10 penalty tax for making an early withdrawal. It’s good to note that the penalty applies to earnings; not the principal. Even though you have the option to take out the money tax-free, it’s good to keep it in there to watch it grow.
  • Regarding Traditional IRAs, you have to pay a 10% penalty tax on the contribution and the earnings.

Also, take into consideration that there are exceptions to the withdrawal penalty. For instance, if you are a first-time homebuyer, you have the right to take an amount up to $10,000 from your Roth IRA to use it toward the purchase of your new home.

Required minimum distributions

Let’s say that today you’re now 70 years old. Six months after your 70th birthday, the IRS requires you to withdraw minimum distributions (RMDs) from your traditional IRA. Also please keep in mind that the IRS is still waiting to tax you because your retirement has been left alone for so long.

If you are retired at 70 ½ years of age and living off your retirement savings, taking out RMD’s is not that big of a deal. If you are the type of person don’t have to withdraw fund from your IRA, this is not as enjoyable to look after. You will not only disrupt the growth of what’s already in your account by taking money out. If you are working and want to put more money into your IRA, it’s not happening.  You can’t contribute to a traditional IRA after 70 ½ years of age.

In regards to those who have long, healthy lives after the age of 70 ½ years of age, the Roth is more flexible. There are no required distribution guidelines with a Roth IRA (unless you inherit a Roth IRA – learn more about out Roth RMDs post to learn more). You also have the freedom and liberty to let your money stay in a Roth IRA to see it grow tax-free for the rest of your life. Moreover, you have the option to continue to contribute to your Roth IRA past 70 ½ years of age. If you are capable of living without the need to touch the money that’s in your IRA to give your beneficiaries more money to inherit, then having a Roth is the best option for you to take.

Traditional and Roth IRA: Compare The Benefits

Furthermore, it’s a good thing to know the guidelines and benefits of both Roth and Traditional IRAs. Take a look at the breakdown below.

Traditional IRAs:

Making contributions to a Traditional IRA lowers taxable income in a contribution year. Overall, your adjusted growth income is lowered. This allows you to receive other tax incentives you wouldn’t get, such as the student loan interest deduction and the child tax credit. Also, please note the ability to take away contributions has the potential to be reduced or taken away altogether if you or your spouse has an employer retirement plan.

If an individual is under the age of 59 ½ and he or she has first-time home-buyer or higher educational expenses, he or she has the right to withdraw up to $10,000 from their account without taking a 10% early-withdrawal penalty. If a person is having a financial hardship such as a recent disability or unreimbursed medical expenses can also qualify for an early withdrawal with taking a penalty. But keep in mind that you will have to pay the distribution costs.

Roth IRAs

You can withdraw Roth contributions (not the earnings) penalty and tax-free even before the age of 59 ½ years.

A person also has the opportunity to withdraw up to $10,000 even before 59 ½ years of age to pay for first-time homebuyer expenses if it’s been at least five years since your initial contribution. These earnings are penalty and tax-free by the way.

There are no boundaries when investing with a Roth IRA. You can invest in things such as lifecycle funds, index funds individual stocks and other investment options.

When a Roth IRA May Make Sense

If you are in the 20% or below tax bracket, getting a Roth IRA is the best option. (Learn more about income tax brackets if you don’t know where you stand.) A Roth IRA is a good option for those who are just starting or changing careers that is leading them into a higher tax bracket.

Why get a Roth? When you withdraw from a Roth IRA, you are not subject to income tax. Moreover, as you begin withdrawing from your Roth IRA savings, the IRS won’t require to pay income taxes when you’re your tax rate goes up.

When a Traditional IRA May Make Sense

If you are in a very high tax bracket or close to retiring, then a traditional IRA is the better option for you. Why may you ask? With a Traditional IRA, you can take a tax deduction when it’s most beneficial to you.

When people hit 40 or mid-to-late 50s years of age, they have the tendency to go to a lower tax bracket due to full or semi-retirement. During this timeframe of their lives, people usually take on lower pay but good work, or simply withdraw less income if expenses decrease. Overall, when you withdraw from a Traditional IRA, it’s taxable as income as long as you after the age 59 ½. When you choose a traditional IRA, you end up saving in the long run because you are withdrawing money in a lower tax bracket.