In our effort to educate the small business owner in how to keep more of their hard earned money, often we get asked: So what is better ROTH or Traditional IRA’s?  So we asked a local Financial Expert to explain the differences.

 

What type of IRA (Traditional or Roth) best meets your financial goals?

Tax Benefits:

Roth:  Tax-free growth.  Tax-free qualified withdrawals.

Traditional:  Tax-deferred growth Contributions may be tax-deductible..

 

Eligibility Age:

Roth:  Any age with employment compensation.

Traditional:  Under age 70½ with employment compensation.

 

Taxation at Withdrawal:  

Roth:  Contributions are always withdrawn tax-free.  Earnings are federally tax-free after the five-year aging requirement has been satisfied and certain conditions are met.

Traditional:  Withdrawals of pre-tax contributions and any earnings are taxable when distributed.

 

Penalties at Withdrawal: 

Roth:  A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies.  (A distribution from a Roth IRA is federally tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, qualified first time home purchase, or death.)

Traditional: Withdrawals before 59½ may be subject to a 10% early withdrawal penalty unless an exception applies.  (For Traditional IRAs, penalty-free withdrawals include but are not limited to: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.)

 

Required Minimum Distributions (RMD’s)

Roth:  Not subject to minimum required distributions during the lifetime of the original owner

Traditional:  RMD’s starting at 70½

 

Maximum Contribution: 

For both 2013 and 2014: $5,500 ($6,500 if you are 50 or older) or 100% of employment compensation, whichever is less

* Catch up contributions:  Individuals age 50 or older (in the calendar year of their contribution) can contribute an additional $1,000 each year

** Contribution deadline:  Tuesday, April 15, 2014, for the 2013 tax year

Note: A Rollover IRA is a Traditional IRA often used for rollovers from an old workplace plan, such as a 401(k).

Feel free to reach out to either us if you have further questions.
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