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Roth: Contributions are always withdrawn tax-free.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).