Explore your IRA options and determine whether you are eligible to contribute.
Planning for retirement

Roth, traditional, or both?

Explore your IRA options and determine whether you are eligible to contribute.
8 minute read
  •  
March 22, 2022
Planning for retirement
Roth IRAs
Article
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Traditional IRAs

At a glance

  • Learn about the 2 types of IRAs: Roth and traditional.
  • Choose an IRA based off factors such as your income and possible tax consequences.
  • Determine if you’re eligible for either (or both).

Tax season is here and you can still contribute for 2021, but you might be wondering where to put your contribution. When it comes to IRAs, there are 2 main types to choose from—Roth and traditional. Making that choice—and knowing when and how much you can contribute—isn’t always clear, so we want to provide some context around one of our most commonly researched topics. Here’s more information on 2 retirement options: Roth IRAs and traditional IRAs.

Common ground

A traditional IRA allows you to contribute money that can grow tax-deferred. A Roth IRA holds after-tax money you can withdraw tax-free. They sound fundamentally different, but both accounts are designed to help you save for retirement. They share other similarities too:

1. Age limit

In the past, you couldn’t contribute to a traditional IRA after you reached the age of 70½. However, with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, you can now contribute to both a Roth IRA and a traditional IRA, no matter your age. The SECURE Act makes it easier for investors to save for retirement by increasing the age for required minimum distributions (RMDs) from 70½ to 72 and removing the age restriction for contributing to a traditional IRA.

2.  Contribution limit

For the 2021 and 2022 tax years, you can contribute up to $6,000 if you’re under age 50, and up to $7,000 (under the IRA catch-up provision) if you’re age 50 or older. These limits apply to the total contributions made to all of your IRAs–including both Roth and traditional IRAs. These are total amounts across both accounts; you can’t contribute the maximum amount to each account separately.  Depending on your income, your contribution limits may be lower.

3. Contribution deadline

Whether you’re contributing to a traditional or a Roth, the deadline to contribute is the same for both accounts (this year the deadline is April 18).

4. Rollover

Unlike an employer-sponsored retirement plan such as a 401(k), you can’t take a loan from your traditional or Roth IRA. However, you can withdraw money from your account for 60 days if you roll it back into the same (or similarly registered) IRA account. You can use this rollover option once every rolling 365 days.

Learn the differences

To better understand the differences between Roth and traditional IRAs, let’s focus on 3 areas: deductions, taxes, and withdrawals.

Traditional IRA

With a traditional IRA, you may be able to deduct your contributions (though the deductible amount could be reduced or eliminated if you or your spouse are covered by an employer’s retirement plan). When it’s time to start withdrawing, your deductible contributions and earnings are taxed as ordinary income. If you do not qualify for deductible contributions, you can make a nondeductible contribution; the nondeductible portion will not be taxed upon withdrawal. Withdrawals work like this:

  • If you withdraw from your traditional IRA before you’ve reached age 59½, you’ll pay ordinary income tax on the amount that represents the pre-tax portion of the distribution, as well as a 10% early distribution penalty (unless an exception applies).
  • If you withdraw after you’ve reached 59½, you won’t be penalized, but you’ll still pay ordinary income tax on the amount that represents the pre-tax portion of the distribution.
  • When you reach age 72 (or when you reach age 70½ if you were 70½ before 2020), you’ll be required to start taking distributions from your traditional IRA. The amount you withdraw for your RMD is calculated based on your life expectancy and the balance of your account at the end of the previous year.

Roth IRA

Contributions you make to your Roth IRA aren’t deductible. This means withdrawals of your Roth contributions (your “basis”) will always come out tax- and penalty-free. Think of it like layers of a cake: When you take your first bite (or in this case, your first distribution), the topmost piece with the frosting is your basis. Beneath that layer? Your earnings. You can make tax-free withdrawals as long as you’re age 59½ or older and you’ve owned your Roth IRA for at least 5 years.* There are no mandatory withdrawals for a Roth IRA because your contributions have already been taxed—meaning you can withdraw your savings at your leisure in retirement.

Eligibility

Any individual with earned income (or who has a spouse with earned income) can contribute to a traditional IRA. However, the amount you can contribute to a Roth IRA could be reduced—or even eliminated—based on your modified adjusted gross income (MAGI).

If you can’t make the maximum Roth IRA contribution because your MAGI is nearing the upper limit of the annual income range, you may still be able to make the maximum IRA contribution (either $6,000 or $7,000, depending on your age) by splitting your contribution between a Roth IRA and a traditional IRA.

Learn more about income limits

Summary

Whether you’re eligible to contribute to a Roth, a traditional, or both, opening this type of account is a step toward a better retirement. Your eligibility may depend on your income—so if you aren’t sure what to do, reach out to a tax advisor to help you make an informed decision.

Ready to choose your IRA?

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*Withdrawals from a Roth IRA are tax-free if you’re age 59½ or older and have held the account for at least 5 years; withdrawals taken prior to 59½ or 5 years may be subject to ordinary income tax or a 10% penalty tax, or both. (A separate 5-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.) The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the Roth IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you’re under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you’re required to keep track of the 5-year holding period for each conversion separately.

All investing is subject to risk, including the possible loss of the money you invest.

We recommend that you consult a tax or financial advisor about your individual situation.

When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.