Currently, there are two popular Individual Retirement
Accounts (IRAs) vying for your attention: the
traditional IRA and the Roth IRA. While both are long-term savings vehicles with tax benefits, each has
different rules concerning contributions, age, and
income that may change from one year to the next.
Perhaps the biggest difference between traditional
IRAs and Roth IRAs is how and when taxes apply to
the contributions and earnings. Contributions to
traditional IRAs can be pre-tax (deductible on the
taxpayer’s income tax return). Although contributions
and earnings accumulate on a tax-deferred basis,
income taxes are due when IRA distributions are
taken and become penalty free after age 59 ½.
On the other hand, contributions to Roth IRAs are
made with after-tax dollars, and contributions and
earnings accumulate tax free. No income tax or
penalty is due when distributions are taken from a
Roth IRA after age 59 ½ and meet the five-year rule.
For tax year 2021, the combined maximum
contribution to a traditional IRA or Roth IRA is $6,000
($7,000 for individuals age 50 or older).
Contributions to traditional IRAs may be made at any
age. Required minimum distributions (RMDs) must
begin by April 1 of the year after an individual reaches
age 72 (or a considerable tax penalty may apply).
Roth IRAs have neither an age limit for contributions
nor minimum distribution requirements. However,
both traditional and Roth IRAs have a minimum age
for distributions: 59 ½. Distributions taken prior to age
59 ½ may be subject to a 10% Federal income tax
penalty (there are several exceptions to this penalty).
Certain situations qualify as exceptions to the penalty,
such as distributions to pay first-time-homebuyer
expenses or qualified education expenses.
Furthermore, before tax-free distributions can be
received from the appreciation of a Roth IRA, the
account must be five years old.
Income Eligibility Limits
Depending on your tax-filing status, your income, and
your participation, or lack thereof, in a qualified
employer-sponsored retirement plan, you may be
eligible to take an income tax deduction for
contributions to a traditional IRA. If you are a single
taxpayer, do not participate in a qualified employer-sponsored plan, and earn a minimum of $6,000,
contributions are deductible regardless of your
adjusted gross income (AGI). However, if you do
participate in an employer-sponsored retirement plan,
income limitations apply. Deductions in 2021 phase
out for single filers with modified AGIs (MAGIs)
between $66,000 and $76,000, and for married
couple joint filers with MAGIs between $105,000 and
The income eligibility requirements are different for
Roth IRAs. If you participate in a qualified employer-sponsored retirement plan, you may contribute to a
Roth IRA; however, if you are also contributing to a
traditional IRA, your contributions may not exceed the
annual contribution limits. You are eligible to make a
full contribution to a Roth IRA if your MAGI in 2021
does not exceed $125,000 for single filers or
$198,000 for married joint filers (contributions phase
out for single filers with MAGIs between $125,000 and
$140,000, and for married joint filers with MAGIs
between $198,000 and $208,000). For a married
individual, filing separately, who participates in a
workplace retirement plan, the phase-out range is $1
A Roth IRA is often a favored choice for those who
participate in a qualified employer-sponsored
retirement plan and exceed the income limits for a
deductible IRA, but meet the income eligibility
requirements for a Roth IRA.
As you investigate which IRA – or combination of
IRAs – offers you the best bottom line, you may want
to consider the following questions:
What tax benefits, current and long-term, are
available to you?
When do you anticipate needing your IRA
An analysis of your personal financial situation and
retirement objectives with a qualified financial
professional can help you develop a financial strategy
to meet your specific needs. Scrutinizing the details
now may save you time and money in the future.
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