What Is the Difference Between a Roth IRA and a Traditional IRA?

Important Differences Between Traditional & Roth IRAs

Traditional and Roth Individual Retirement Accounts (IRAs) have these features in common:

  • Both are vehicles to help provide for your long-term financial security; and
  • Each type of IRA is a personal retirement savings plan that offers certain tax advantages to those who qualify.

But there are some important differences between the two types of IRAs, as outlined in the following table:

 

Traditional IRA

Roth IRA

Types of contributions

  • Before-tax contributions (if you qualify)1
  • After-tax contributions

Tax advantages
  • At contribution: Contributions may be tax deductible, depending on your modified Adjusted Gross Income and other factors.

  • At distribution: You pay federal taxes on your account’s investment earnings and on pre-tax contributions when you withdraw your money.
  • At contribution: Contributions are made on an after-tax basis and are not eligible for a tax deduction. 


  • At distribution: You do not pay federal taxes on your withdrawals (including investment earnings) if you meet certain requirements2.

Type of income required

For either type of IRA, you—or your spouse, if you file a joint return—must have earned income, such as wages, salaries, commissions, tips, bonuses, or income from self-employment.

Income limits
  • None, but your ability to deduct your contributions from your income may be limited if you or your spouse is eligible to participate in an employer-sponsored retirement plan1.
  • Your modified Adjusted Gross Income must be below certain limits, depending on your tax filing status3.

Age limits for contributions
  • You may no longer make contributions for the year in which you reach age 70½—or in later years.
  • You may continue making Roth IRA contributions after age 70½ if you have earned income.

Contribution limits/deadlines

The maximum amount you can contribute to a Roth IRA and traditional IRA combined, is $5,000 or your taxable compensation for the year—whichever is less. You may contribute up to $6,000 if you are 50 or older by December 31 of that tax year.4
You can open a Roth IRA and make a contribution for a tax year up until the due date (without extension) of the tax return for that year. Generally, this is the April 15th following the tax year. For example, you can make a Roth IRA contribution for 2012 from January 1, 2012 through April 15, 2013.

Distributions
(Withdrawals)
  • Generally, you must begin taking withdrawals by April 1st following the year in which you reach age 70½.
  • You may take withdrawals of your own contributions at any time for any reason, tax- and penalty-free5.
  • You are not required to take mandatory distributions at any age during your lifetime.
  • Your beneficiaries will be subject to minimum distribution rules.


Where You Can Open an IRA

You can set up an IRA at many different financial institutions—such as banks, insurance companies and brokerage firms.

Before You Open a Traditional or Roth IRA…

Because the information presented here is merely a summary of the differences between traditional and Roth IRAs, you may wish to consult a financial professional for assistance. If you prefer, a Certified* Prudential Retirement® Counselor can assist you. Simply call
1-877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET.




*Many of Prudential Retirement’s Personal Retirement Services Retirement Counselors carry the distinct designation of Certified Retirement Consultants, an advanced certification available through the International Foundation for Retirement Education (InFRE). Certification includes mastery of retirement plan design, investment strategy, retirement income management, and retirement readiness and counseling.

1 If you or your spouse is eligible to participate in an employer-sponsored retirement plan, your contributions may only be tax deductible if you meet certain income and tax filing status requirements.

2 In order for distributions to be made from a Roth IRA free of penalties and federal income taxes, your Roth IRA must have been established at least five tax years before the withdrawal (period begins with the tax year for which your first contribution is made) and your distribution must be: 1) made on or after the date you attain age 59½; 2) made to your beneficiary or your estate after your death; 3) attributable to your being disabled; or 4) taken because you are a qualified first-time home-buyer (lifetime limit of $10,000).

3 For tax year 2012, you can generally contribute to a Roth IRA if you have earned income and your modified Adjusted Gross Income does not exceed: a) $183,000—if you are married, filing jointly or a qualifying widow or widower; b) $125,000—if you are filing as single, head of household, or are married, filing separately, and did not live with your spouse at any time during the year; or c) $10,000—if you are married, filing separately, and lived with your spouse at any time during the tax year. (For 2011, the comparable income limits are $179,000 for married filing jointly; $122,000 for single, and $10,000 for married filing separately.)

4 Contribution limits shown are for 2011 and 2012 tax years, and are indexed for inflation.

5 Does not apply to investment earnings on your account or dollars contributed to your account through a conversion.

Related Links
Related Articles
Should I Open an IRA?
Should I Open a Roth IRA?
Roth IRA Conversions Available to More Retirement Savers in 2010
Related Tools
Roth vs. Traditional IRA Calculator
Roth IRA Conversion Calculator
Roth Contributions Calculator


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