We hear a lot of potential clients ask, “Which is better: a Roth IRA or traditional IRA? And what’s the difference, anyway?”

There are distinct differences between them, not the least of which is the tax advantage that each one affords. And that can translate into hundreds, even hundreds of thousands, of dollars that could be available to you at retirement age.

What’s the Difference Between a Roth IRA and Traditional IRA?

Let’s start with basic definitions.

What is a traditional IRA?

An IRA, or individual retirement account, is a type of savings vehicle that offers tax advantages to its owner, provided he or she follows IRS requirements. Anyone who has earned income and is under age 70½ can contribute to a traditional IRA. With this type IRA, a person’s contributions are tax-deferred — that is, the funds are not subject to income tax until withdrawn or distributed from the account (usually at retirement). And contributions are deductible on your yearly income taxes.

What is a Roth IRA?

A Roth IRA — named for Delaware Sen. William Roth and established by the Taxpayer Relief Act of 1997 — is a specialized type of individual retirement plan that is funded with after-tax dollars, so it can grow tax-free. There is no age restriction regarding Roth IRAs, but there are income restrictions. And while you do not have to pay tax on Roth withdrawals, you may not deduct your Roth contributions on your income tax.

Other defining characteristics of a Roth IRA, according to Investopedia:

  • Contributions can continue to be made once the taxpayer is past the age of 70½, as long as he or she has earned income.
  • The taxpayer can maintain the Roth IRA indefinitely; there is no required minimum distribution (RMD)  during the account holder’s lifetime.
  • Eligibility for a Roth account depends on income. Certain requirements must be met, and income cannot exceed a certain amount, which the IRS adjusts periodically.

For 2018, those income amounts are:

  • $199,000 for individuals who are married and file a joint tax return
  • $10,000 for individuals who are married, lived with their spouses at any time during the year and file a separate tax return
  • $135,000 for individuals who file as single, head of household, or married filing separately and did not live with their spouses at any time during the year

Both types of IRAs can be funded from a variety of sources, including regular contributions, spousal IRA contributions, transfers, rollover contributions, conversions and recharacterizations.

You can refer to our chart for some of the main points of difference. You also can read more on the IRS website.

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