Choosing between a Traditional & Roth IRA

E*TRADE Securities2

03/15/17

Traditional and Roth IRAs are accounts that allow annual contributions and may provide tax advantages as contributions potentially grow over time. Everyone who earns a paycheck is eligible to contribute to an IRA. Spouses are also eligible, even if they have no income.

When it comes to IRAs, what most people want to know is: How does one choose between a Traditional and Roth IRA? The answer: It depends on a variety of factors. We’ll explore a few of these factors below.

If eligible for both a Traditional and a Roth IRA, individuals can determine which IRA may best fit their needs by considering the following two questions:

Is a tax deduction now important, even if there will be taxes on the withdrawals later? If yes, a Traditional IRA may be more appropriate.

Are tax-free withdrawals in the future more attractive, even if contributions are not tax-deductible now? If yes, a Roth IRA may be the better option.

The IRA Selector tool3 may help simplify the choice. This easy-to-use, online tool will ask a few simple questions, and then provide a potential option in minutes.

Whether contributing to a Traditional or Roth IRA, the maximum contribution amount will be $5,500 per year ($6,500 if you’re age 50 or older). IRA investing may be a great way to build up account balances, even for those who have delayed saving for retirement. As individuals look ahead to independence from the working world, it’s important to consider contributing to the IRA that may provide the most benefits, both now and in retirement.

If you need help call 1-877-921-2434. One of our dedicated Retirement Representatives will be happy to assist.

Employer plan participation

If neither the individual nor their spouse has access to an employer’s plan, a contribution to a Traditional IRA may make sense, as it will be fully deductible no matter how much they earn. However, if either is covered by an employer’s retirement plan, they would need to factor in how much income is earned to see if a contribution to a Traditional IRA would be deductible.

Earned income

Earned income would include wages, salaries, tips, and bonuses. It would not include income from dividends, pensions, or annuities. Individuals or their spouse must have earned income to contribute to either a Traditional or Roth IRA.

Tax-filing status

Tax-filing status is another factor in determining the amount that an individual can contribute to a Roth IRA, or whether you can deduct a Traditional IRA contribution. For example, if an individual is covered by an employer’s retirement plan, is married filing jointly, and the combined household annual income in 2016 or 2017 is:

  • Less than $98,000 ($99,000 in 2017) – You can take a full deduction when contributing to a Traditional IRA.
  • Between $98,000 and $118,000 ($99,000 - $119,000 in 2017) – You may be able to partially deduct your Traditional IRA contribution.
  • Greater than $118,000 ($119,000 in 2017) – No deduction is allowed. You may want to consider a Roth IRA instead.

Keep in mind, however, that too much income may disqualify someone from contributing to a Roth IRA. For 2016 if you are married filing jointly and earn more than $194,000 per year ($196,000 in 2017), you cannot contribute to a Roth.

Age

Age is another important factor in choosing the right IRA. For example, individuals over age 70½ are not eligible to contribute to a Traditional IRA, but can contribute to a Roth. Age also determines if someone is eligible to make “catch-up contributions". The maximum IRA contribution for individuals through age 49 is $5,500. Individuals age 50 and older can make an additional “catch up” contribution of $1,000 each year.