A Traditional IRA is the IRA originally chartered by the U.S. government. There are two primary benefits of a Traditional IRA.
- The earnings of the IRA are tax deferred until withdrawn.
- For many taxpayers, the contributions to the IRA are tax deductible.
A Roth IRA is a more recent form of a retirement savings plan. The principal benefit of a Roth IRA is that all earnings will accumulate tax-free if the withdrawal meets the qualifications of a qualified distribution.
Traditional vs. Roth IRA
Differences at a glance:
|Traditional IRA||Roth IRA|
|Tax deductible contributions for qualified investors||Contributions are not tax deductible|
|No tax-free withdrawals||Tax-free withdrawals for qualified distributions|
|Withdrawal penalty of 10% if you are under the age of 59 1/2 (Some exceptions apply.)||Withdrawal penalty of 10% on earnings if you are under the age of 59 1/2 (Some exceptions apply. Must also meet Roth IRA five-year aging requirement.)|
|Eligibility under age 70 1/2 with earned compensation||No age restriction as long as you have earned compensation|
|Mandatory distributions must begin at age 70 1/2||No mandatory distributions|