What is the Difference Between a Roth and Traditional IRA?

Differences Between a Roth IRA and Traditional IRA

In terms of IRA, there are major differences between a Roth IRA and a traditional IRA. Below is an outline of differences between a Roth and a Traditional IRA.

Age Limit on opening and contributing to the IRA

Traditional IRA has an age limit of 70½. That means, anyone older than 70½ cannot set up a traditional IRA account. Roth IRA, on the other hand, has no age limit. You can be older than 70 ½ and still set up and contribute to a Roth IRA.

Income limit of contributions to Roth IRA and Traditional IRA

While taxpayers can always contribute to a traditional IRA no matter how much he or she earns, to contribute to a Roth IRA, the taxpayer must meet not make more than a certain level of income.

Tax deductions of contributions to Roth vs Traditional IRA

Traditional IRA contributions can be deducted depending on your income, filing status, whether you are covered by an employer retirement plan or not, and whether  you receive social security benefits or not. Roth IRA contributions, however, are not tax deductible. While Roth IRA owners cannot deduct their contributions upfront, they have major advantage when withdrawing from the Roth IRA which is why a large number of taxpayers prefer opening Roth IRAs. Roth IRA is especially desirable when you think you will make more money later on.

Is there a tax form to fill out when contributing to a traditional IRA or a Roth IRA?

For most people, there is no tax form to fill out when contributing to either the Roth IRA or the traditional IRA. However, for traditional IRA, if you make any nondeductible contributions, then you must file the IRS tax form 8606 for Nondeductible Contributions. Roth IRA contributions are never tax deductible so you would never have to file separate tax forms for Roth IRA contributions.

Mandatory distributions for Roth vs Traditional IRA

For traditional IRA, the traditional IRA owner has to start taking required minimum distribution or RMD by April 1st of the year he or she turns 70½. Roth IRA owners, however, are not required to take any required minimum distributions or RMD no matter how old he or she is.

How are distributions of Roth IRA vs traditional IRA taxed?

Distributions from a traditional IRA are taxed as ordinary income. Be sure to not include nondeductible contributions because you already paid tax on them. If you don't separate or keep record of your nondeductible contributions, you may end up paying tax twice on the same money. Distribution from a Roth IRA are not taxes providing the Roth IRA owner meets certain Roth IRA criteria for nontaxable distributions.

What tax form do I need to file for receiving a distribution from a traditional IRA vs Roth IRA?

While contributing nondeductible contributions to a traditional IRA needs the tax form 8606, there is not form to file for receiving distributions from a traditional IRA. When receiving distributions from a Roth IRA, however, you need to file the tax form 8606.