Here is the website with a breakdown of the two forms. If you click on the links in it, it will give the income limits.

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February 26, 2021 – The Differences Between the Roth and Traditional IRA

Individual Retirement Accounts (IRA) are an essential tool for retirement planning. They allow individuals to save money in a tax-advantaged account, providing a financial cushion for their golden years. Two popular types of IRAs are the Roth IRA and the Traditional IRA. While both serve the same purpose, they have distinct characteristics that set them apart.

1. Tax Treatment:
The key difference between the Roth and Traditional IRA lies in how they are taxed. The Traditional IRA allows individuals to make tax-deductible contributions, meaning the money is contributed before taxes are taken out. However, withdrawals during retirement are taxed as ordinary income.

In contrast, the Roth IRA works the opposite way. Contributions are made with after-tax dollars, so they do not provide any current tax deduction. Nevertheless, withdrawals made during retirement, including any earnings, are tax-free, as long as specific criteria are met.

2. Income Limits:
Eligibility for contributing to a Roth IRA depends on the individual’s modified adjusted gross income (MAGI). In 2021, single taxpayers with a MAGI below $125,000 can contribute the maximum amount, with a gradual phase-out up to $140,000. For married couples filing jointly, the MAGI limits are $198,000 for the full contribution and phase-out up to $208,000.

On the other hand, the Traditional IRA does not have any income restrictions for contributions. However, tax deductibility of contributions may be limited if the individual or their spouse is covered by a retirement plan at work.

3. Required Minimum Distributions (RMDs):
Traditional IRAs require individuals to start taking Required Minimum Distributions (RMDs) by age 72, regardless of whether they need the money or not. These distributions are taxed as ordinary income. Failure to take these distributions can result in hefty penalties.

Roth IRAs, however, have no RMDs during the account owner’s lifetime. This means individuals can continue to let their investments grow tax-free and pass the account to beneficiaries without forced distributions.

4. Early Withdrawals and Penalties:
Both Roth and Traditional IRAs allow individuals to withdraw their contributions at any time without penalties. However, for earnings, early withdrawals from a Traditional IRA before age 59 ½ are subject to a 10% penalty on top of the income tax owed. Conversely, qualified distributions from Roth IRAs can be made after five years of the account’s opening or when the account owner reaches age 59 ½, without incurring taxes or penalties.

5. Future Tax Rates:
Deciding between a Roth and Traditional IRA also requires considering your future tax situation. If you anticipate paying higher tax rates during retirement, opting for the Roth IRA may be advantageous. Conversely, if you expect your tax rates to be lower in retirement, a Traditional IRA might be more beneficial.

Choosing between a Roth and Traditional IRA depends on an individual’s unique financial circumstances and goals. It is advisable to consult with a financial advisor or tax professional to assess which option aligns best with your situation.

In conclusion, Roth and Traditional IRAs each have their own advantages and considerations. Understanding the differences between these retirement savings tools can help individuals make informed decisions to secure their financial future.