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Roth IRA versus a traditional IRA

Published on April 15, 2011

When comparing a Roth IRA versus a traditional IRA it’s important to understand that when money is first invested in a Roth IRA, it is federally taxed based on the tax bracket one currently inhabits. When money is taken out of the Roth IRA, however, funds up to the amount put into it are always federal-tax free, and often the entirety of the funds are free from federal taxes. That’s one of the biggest differences between a Roth IRA versus a traditional IRA – the funds are taxed going in but not when they are withdrawn. That’s why it’s important to consult with a retirement planning expert who can advise you the best tax implications for you based on your individual circumstances when considering the benefits of a Roth IRA versus a traditional IRA.


A Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. It is an individual retirement arrangement. However, when comparing a Roth IRA versus a traditional IRA, it’s important to understand that a Roth IRA differs from traditional IRAs in that contributions are not deductible. For information on contributions and the limitations please refer to Chapter 2 of the Publication 590, Individual Retirement Arrangements.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. To be eligible to contribute to a Roth IRA versus a traditional IRA, you must meet IRS designated income limits, which are adjusted periodically. For more information on current Roth income limitations please visit the IRS website at www.irs.gov.

If you satisfy the IRS regulated requirements (which include a five year holding period), qualified distributions are tax free. Additionally, you may take tax free and penalty free distributions of basis (the amount you originally contributed) at any time. Contributions can be made to your Roth IRA after you reach age 70½, and you can leave amounts in your Roth IRA as long as you live, as the Roth IRA is not subject to the Required Minimum Distribution rule.


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