Individual Retirement Accounts (IRAs)
Choose the IRA that's right for you.
Our two cents
A tax-advantaged Individual Retirement Account (IRA) is a great way to save for retirement. It can provide tax deductions, the potential for tax-sheltered long-term growth, and an opportunity to save above and beyond what you may contribute to an employer-sponsored plan.
There are two primary types of IRAs: traditional and Roth. One or the other may be right for you, depending on your circumstances.
The differences between traditional and Roth IRAs
Both traditional and Roth IRAs let your retirement savings grow tax-deferred. But there are several key differences that might make one more appropriate for you than the other.
- Traditional IRA—Contributions to a traditional IRA are tax-deductible depending on your income and whether you participate in an employer-sponsored plan such as a 401(k). Your earnings can grow tax-free but are taxed as ordinary income when you withdraw them.
- Roth IRA—There's no up-front tax deduction for a contribution to a Roth, but you can withdraw the earnings income tax free at age 59½ if you've held the Roth for five years. There are also maximum income qualifications for contributing fully to a Roth IRA that vary from $122,000 to $137,000 for singles and $193,000 to $203,000 if you're married filing jointly for the 2019 tax year.
How to decide:
- Consider a traditional IRA if you qualify for the up-front deduction and think your tax bracket will be much lower when you retire than it is today.
- Choose a Roth IRA if you think your tax bracket will be higher when you retire—an important consideration if you haven't yet reached your peak earning years.
What you can contribute
If you have earned income, you can contribute up to the maximum annual contribution. Annual contribution limits are the same for traditional and Roth IRAs:
- For tax year 2019, you can contribute a maximum of $6,000.
- If you're 50 or older, you can make an additional $1,000 catch-up contribution for a total of $7,000.
When you can withdraw your money
To discourage people from withdrawing their money too early, there are taxes and penalties associated with early withdrawal, depending on the type of IRA. See the chart below.
You don't need an employer-sponsored plan to save for your future
Depending on your circumstances, you may also want to consider one of the following accounts, all of which can be either a traditional or Roth IRA:1
- Rollover IRA—If you've changed jobs or retired and have retirement assets at a former employer
- Spousal IRA—If your spouse is not currently working but wants to contribute to an IRA
- Custodial IRA—If you want to establish a retirement account for a minor
- Inherited IRA—If you're the beneficiary of an IRA and want to preserve the tax-deferred status of the account
- Traditional IRA
- Roth IRA
Eligibility>Anyone with earned income can open one (and contribute up to amount of earned income).>Available to single filers and those married filing jointly who make under the maximum adjusted gross income thresholds for that year.>
Tax Considerations>Contributions are tax-deductible (depending on income level and participation in an employer-sponsored plan).>Contributions are not tax-deductible.>
Withdrawals are taxed at ordinary income rates.>
All funds (including principal contributions) withdrawn before age 59½ are subject to a 10% penalty (subject to certain exceptions).All withdrawals of earnings and principal are tax-free, subject to certain limitations.>
Contributions can be withdrawn at any time without taxes or penalties. Earnings can be withdrawn without penalty if you are at least 59½ and your account has been open for five years or more.
Mandatory Distributions>You can begin withdrawing, penalty-free, at age 59½. Withdrawals are mandatory in the year in which you reach age 72 (70½ if you turned 70½ prior to 2020).>There is no mandatory distribution age.>
Exceptions to Early Withdrawal Penalties>Death of IRA owner.>
Disability of IRA owner.
Medical expenses in excess of 7.5% of adjusted gross income.Medical insurance premium while unemployed (requires 12 consecutive weeks of unemployment compensation).
Qualified higher education expenses.
Qualified first-time homebuyer (up to $10,000).
Substantially equal periodic payments (must continue for at least five years, or until age 59½).
Qualified domestic relations order.
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1. In the eyes of the IRS, there are only two types of IRAs: traditional and Roth. All other terms, such as "rollover IRA," "custodial IRA" or "non-deductible IRA" are simply unofficial terms that describe either a traditional or Roth IRA.