Don’t Leave that 401K at Your Old Employer…You Have Choices

February 22, 2016 by novallus

Traditional v Roth IRA: What’s the Difference?[Guest Blog Post]

When helping clients decide which retirement account is right for them, one of the most common considerations comes down to Traditional v. Roth. In the past, the decision was specific to Individual Retirement Accounts (IRAs). Today the Traditional v Roth discussion has expanded beyond IRA’s to 401(K) and more. But for the purpose of this article I’ll focus IRAs.

Contribution Limit

Each IRA has an annual contribution limit of $5,500 with an annual catch-up of $1,000 for those over 50.

Taxability

The primary difference between a Traditional IRA and a Roth IRA is the time they are taxed. A traditional IRA may be deductible from federal income taxes in the year the contribution is made. That money grows tax deferred until that money is withdrawn. IRA’s are designed to be used for retirement savings, so the IRS imposes penalties on funds withdrawn before the age of 59.5. There are special circumstances that may allow a withdrawal from a traditional to avoid penalties.

Roth IRAs are not tax-deductible upon deposit. A Roth is invested using after-tax dollars. The benefit is tax-free growth for as long as the money is invested.

Required Minimum Distribution (RMD)

Traditional IRAs are subject to RMD. RMD means once a person has reached age 70.5 they MUST stop contributing and begin taking withdraws from their retirement accounts. Roth IRAs are not subject to this rule. An investor may continue making deposits beyond age 70.5 if they choose.

Income Rules

Traditional IRA’s have no income limit. If the contributing person is eligible to contribute to an employer plan, contributions may not be income tax-deductible (one of the main benefits to contributing to a traditional IRA). However, a self-employed small business owner, or an employee that has maxed-out their employee 401(K) contribution may see the benefit in contributing to a Traditional IRA.

A Roth does have income limits. Once a person begins to make over a certain amount the ability to contribute begins to fade and eventually goes away.

Liquidity

A unique factor regarding a Roth is your “basis” or how much has been contributed. Your basis may be withdrawn at any time without penalty. This feature is not available with a Traditional.

As you can see, there are unique aspects of both a traditional and Roth IRA. I recommend discussing the nuances of each with a financial advisor. Give me a call if you want to learn more!

Jeff Mahoney, CFP®

HJ Sims

952.683.7503

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