Updated: May 13, 2022
• Contributions to a Roth are not deductible, so taxes are paid at your current tax rate.
• When the Roth funds are distributed, your tax rate is immaterial as the principal has already been taxed, and the earnings are tax-free.
• You would need to satisfy a five-year waiting period to receive the fund's penalty-free
• The length of time that you keep the investment favors the Roth IRA with the tax-free growth of the earnings.
• There is no required minimum distribution (RMD) of the Roth. The amount of any distributions is discretionary and can remain in there to pass onto your heirs.
While an immediate tax deduction may seem like a good idea, planning for retirement and weighing the different options is important. However, the most important factor is to have a
retirement savings plan. The following data comes per the Federal Reserve's Survey of Consumer Finances. (numbers rounded to the nearest
Roth vs Traditional IRA:
When making the decision of how to invest your retirement funds, you should consider several factors. Say, for example, that your tax rate is 32% and you plan to invest $5,000 in an IRA which is earning 6% interest. And, further, neither you nor your spouse has a qualified plan through work so the full amount would be deductible. Do you take advantage Of the current year's reduction in taxable income or plan for the tax-free distribution of earnings at retirement?
Traditional and Roth IRAs allow you to save money for retirement. This chart highlights some of their similarities and differences.
Who can contribute?
Are my contributions deductible?
Your contributions aren’t deductible.
How much can I contribute?
The most you can contribute to all of your traditional and Roth IRAs is the smaller of:
What is the deadline to make contributions?
Your tax return filing deadline (not including extensions). For example, you can make 2020 IRA contributions until April 15, 2021.
When can I withdraw money?
You can withdraw money anytime.
Do I have to take required minimum distributions?
Not required if you are the original owner.
Are my withdrawals and distributions taxable?
Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.