- Contributions you make to traditional IRAs are tax deductible, meaning you don't pay income taxes on the money you save up front. With Roth IRAs, contributions are not tax deductible; in other words, you have to use after-tax dollars to fund a Roth IRA. The advantage of a Roth IRA is that funds you withdraw during retirement are not subject to taxation as long as you've had the money in your account for at least five years. On the other hand, withdrawals from traditional IRAs and 401k plans are subject to income tax.
- Withdrawals from retirement accounts are also called distributions. If you take distributions from a Roth IRA before the age of 59 1/2, some of the money you take out may be subject to a 10 percent early withdrawal penalty. According to CNN, you can withdraw the contributions you make to a Roth IRA without penalty, but you'll be penalized for taking out investment earnings before age 59 1/2.
- Contributions to Roth IRAs are limited based on your income level and age. The IRS states that the contribution limit for Roth IRAs is $5,000 for those under age 50, and $6,000 for people 50 or older. In addition, if your income is $179,000 or more as a married couple filing a joint return, or $122,000 or more as a single filer, you cannot contribute to a Roth IRA. The amount you contribute begins to phase out at an income of $169,000 for joint filers and $107,000 for single filers.
- Holders of 401k plans and traditional IRAs are subject to required minimum distributions that begin at age 70 1/2. If you fail to make a required distribution, the amount you were required to withdraw is taxed at 50 percent. With Roth IRAs, you are not subject to required minimum distributions; you can keep money in your Roth IRA as long as you please without penalty.
Roth IRA Tax Rules
Withdrawal Penalties
Contribution Limits
Required Distributions
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