You’ve probably heard about Traditional IRAs and Roth IRAs for retirement. But what is the difference between the two accounts? Here are some basic things you should know:
With a Traditional IRA, you can contribute (deposit) pre-taxed earnings, and are tax-deductible, meaning you can reduce your taxable income and reduce the amount of income taxes owed. The contributions you make with a Roth IRA are funded with after tax dollars, meaning you cannot deduct it from your taxable income.
However, Roth IRA earnings grow tax-free, and you won’t have to pay taxes on qualified withdrawals. A Traditional IRA’s earnings are tax-deferred, meaning you won’t have to pay taxes on them until you withdraw the funds.
While you can start making withdrawals from both IRAs without penalty at age 59.5, you are required to make annual withdrawals from your Traditional IRA at age 72.
You are only allowed to contribute up to a certain limit to either IRA annually. For 2024, the limit is $7000 ($8000 if you’re age 50 and older).
While you can contribute to a Traditional IRA no matter how much money you make, a Roth IRA has income limits. As of 2024, your gross income (before taxes) must be less than $161,000 if filing single ($240,000 if filing jointly).
