Share  |  Print
Money Minute
Quick Tips
Traditional vs. Roth IRAs
Money Minute Quick Tips
Today I thought I would dig a little deeper into the differences between Traditional and Roth IRAs.

Today I thought I would dig a little deeper into the differences between Traditional and Roth IRAs.

As you may recall, when you hear IRAs, think "Individual Retirement Accounts". These are wonderful retirement tools because they allow for your investments to grow tax deferred. However, as their name suggests, you need to keep in mind these accounts are specifically meant for retirement purposes - so if you pull your money from these accounts BEFORE you turn 59 ½ years old, you will have to pay a 10% penalty as well as taxes on your earnings. Now to some differences.

When you invest in a Traditional IRA, your earnings grow tax deferred until you access the account after 59 ½. At that time, any earnings are considered income - and therefore is subject to taxes. Now Roth IRAs also allow your investments to grow tax deferred. However, when you access these accounts after 59 ½, your earnings are tax-free. So why would anyone consider Traditional IRAs?

First, some individuals don't qualify for Roth IRAs. For 2015, if you file your taxes as an individual and your adjusted gross income is above, $116,000 you do not qualify; if you are a married couple filing jointly, your adjusted gross income must remain below $183,000 to qualify. As you may have guessed, Traditional IRAs do not have this income cap, so everyone under the age of 70½ with earned income may contribute.

Another reason some may choose a Traditional IRA is for a tax deduction. Unlike Roth IRAs, contributions into a Traditional IRA may be eligible for a tax deduction. This depends on each individual situation, but can be useful if you're looking to lower your taxes. As always, check with your favorite licensed tax advisor.

The information on this page is provided for educational purposes only and is not tax, legal, financial planning or investment advice. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products. The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.

Past performance does not guarantee future results. © Ariel Investments, LLC. This website and all of its content is for informational and educational purposes only and should not be considered to be investment advice or a recommendation to buy or sell any particular security. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC. Use of this website is subject to our Terms & Conditions. The Ariel mutual funds referred to in this site may be offered only to persons in the United States. This web site should not be considered a solicitation or offering of any investment products, funds or services to ineligible investors, investors for whom such products, funds or services are not suitable, or investors outside the United States.

Check the background of this firm on FINRA's BrokerCheck
Ariel Distributors, LLC is a member of the Securities Investor Protection Corporation