Roth IRA vs Traditional IRA

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This is a guest post by Matt Robinson

roth-vs-traditional-1956196Are you trying to decide between a Roth IRA and a Traditional IRA? While they are both great saving retirement account options, there are some significant differences between the two.

Here is a breakdown of each type of account, including information on contribution limits and more:

Roth IRA

A Roth IRA is considered to be a tax-exempt at withdrawal account, meaning that – as long as you meet all account requirements – you do not pay taxes on money that you withdraw from your account. It also means that you will not be taxed on your IRA account earnings.

Here are the basics of a Roth IRA Account:

– As long as all requirements are met, your contributions are tax-exempt upon withdrawal. – The contributions that you make to your account are not tax-deductible and will not adjust your annual gross income (AGI). – Your account must be open for a minimum of five years before you can make withdrawals without incurring penalty fees. – You must be 59½ years old to avoid early penalty withdrawal fees. – If you withdraw early, you will be assessed taxes and a 10% penalty. – There are some exceptions that will allow you to make early withdrawals without being penalized, including making a withdrawal as a first-time home-buyer. – There are income limits for Roth IRA contributions. Single filers who earn over $95,000 and joint filers who earn over $150,000 do not qualify to fund a Roth IRA.

Traditional IRA

A Traditional IRA is considered a tax-deferred retirement savings account. This means that when you make contributions to your Traditional IRA, the money is not taxed at the time of the contribution, but is instead taxed when you begin to make withdrawals.

Here are the basics of a Traditional IRA:

– Contributions are not taxed, thereby lowering your annual adjusted gross income – in some instances even bringing you down to the next lowest tax bracket. – Your contribution earnings are taxed at the time that you withdraw money from your account. – You can begin to make withdrawals at 59½ and must begin making minimum withdrawals at age 70½. – If you withdraw funds early, you will be assessed a 10% penalty fee. – There are several withdrawal exceptions, including an exemption for withdrawals made for higher education expenses. – There are no income limits for contributing to a Traditional IRA.

Contribution Limits for 2011

There are contribution limits for both Roth and Traditional IRAs. For the 2011 tax year, the IRA contribution limits are as follows: – If you are under the age of 50 at the end of 2011, you can contribute a maximum of $5,000 (combined) total to your Roth and Traditional IRA accounts. – The contribution limit can either be split between the two accounts or deposited into just one. – For Roth IRA holders – depending upon adjusted gross income – the contribution amount may be reduced. If your taxable earnings exceed the maximum income level, you may not be able to make any contributions at all. – If you are over the age of 50 at the end of 2011, all of the aforementioned criteria remains the same; however, your contribution limit is higher, at $6,000.00.

Which Type of Account is Right For Me?

Deciding between a Traditional and Roth IRA can be tricky for some. While many investors would say a Roth IRA is the way to go – since the long-term tax benefits are typically greater – there are other things to consider as well. For many, the lowered AGI from contributing to a Traditional IRA can make a significant difference in one’s tax bill. Additionally, if your AGI is above the income limits for a Roth IRA, you will only be able to make contributions to a Traditional IRA account. The bottom line is that you will have to look at your particular situation and determine the IRA account type that makes the most sense for you.

About the Author: This guest post was provided by Matt Robinson, whose website,, helps taxpayers understand and resolve a number of different tax problems, including IRS tax liens, bank levies, tax audits, unpaid taxes and more. Matt’s website also features a popular tax blog that provides information about recent tax changes and advice on how to reduce tax liability.