With a Roth IRA, you make post-tax contributions to the plan so you cannot deduct your contributions to the plan on your taxes (because of that your money grows tax-free). If you follow the rules, then you can withdraw funds penalty-free when you are ready to retire. You can contribute to a Roth IRA after age 70 ½, unlike a traditional IRA.
There are limitations on who can participate in Roth IRAs. In general, those who can contribute, either up to the limit, a reduced amount, or nothing (zero), include the following:
||Adjusted Gross Income (AGI)
Head of household
|Less than $120,000
|$120,000 - $134,999
|Greater than $135,000
|Less than $189,000
|$189,000 - $198,999
|Greater than $199,000
|Less than $10,000
|Greater than $10,000
Via the IRS
For more info on calculating your reduced amount, click here.
With a traditional IRA, you contribute pre-tax money to the plan, and then pay taxes when you withdraw the funds in retirement. You can get a tax deduction for contributions with a traditional IRA. When you contribute pre-tax dollars, your taxable income is reduced by however much you contributed that year. So, say your salary is $50,000 and you contribute $10,000 to your IRA, then your taxable income would be $40,000 so you would owe less on your income taxes. In order to participate in an IRA, you must earn an income and be under the age of 70 ½.
Difference between Roth & IRA accounts
The main difference between a Roth IRA and a Traditional IRA is when the individual pays taxes on their retirement investments. Roth IRA taxes are paid prior to investing, whereas Traditional IRA taxes are paid when withdrawing funds after the investment has matured.
The decision between the two types of retirement accounts should be evaluated on a case-by-case scenario. Traditionally, people decide on a traditional IRA because they intend to make less money in retirement than when they are working. Therefore, the individual will have a lower taxable income and may even drop to a lower tax bracket in retirement. On the other hand, Roth IRAs take all uncertainty out of the equation. The biggest uncertainty is the tax rate. The tax rate might be higher or it might be lower when you retire. By paying pre-tax through a Roth IRA, the investor knows the exact tax rate they will pay on their retirement funds.
Is there a maximum you can contribute to a traditional or Roth IRA in a year?
For 2017 and 2018, the maximum you can contribute to a traditional or Roth IRA is $5,500. Those 50 years and older can contribute $1,000 extra each year, for a total of $6,500. However, if you choose to rollover contributions from a 401k into an IRA, the limit does not apply to those funds.