An Individual Retirement Account (IRA) is a savings plan that allows you to defer taxes on the interest you earn until retirement age. In many cases, the money you contribute is tax-deductible.
A Roth IRA is funded with post-tax dollars. Although contributions are not tax-deductible, distributions, including earnings, are income tax-free and IRS penalty-free when taken for qualified reasons.
|Traditional IRA||Roth IRA|
|Who is eligible?||Anyone with earned income may open or add to a Traditional IRA up to age 70½. There is no minimum age requirement as long as the IRA contribution comes from earned income.||Individuals whose income does not exceed the modified adjusted gross income (MAGI) limits may contribute to a Roth IRA. The MAGI is derived by taking your adjusted gross income figure and adding certain deductions or adjustments to this number on your federal tax return.|
|How much can I contribute?||You may contribute 100% of your earned income up to $5,500 per year (less any Roth IRA contributions).||You may contribute up to $5,500 per year (less Traditional IRA contributions) if your modified adjusted gross income (MAGI) is under the prescribed limit for that year. If the MAGI exceeds these limits in a given tax year, a contribution may not be made to a Roth IRA.|
|What amount is tax-deductible?||The tax-deductible amount varies depending on marital status, income, and whether you have a retirement plan at work. Please consult your tax advisor to determine how much of your IRA contribution is tax-deductible.||Roth IRA contributions are not tax-deductible.|
|When may funds be withdrawn?||You may withdraw funds when you reach 59½ years of age. Because withdrawals are taxed as ordinary income, some people prefer the tax advantage of taking withdrawals in installments. However, you may withdraw the entire amount in one lump sum.||
Withdrawals of earnings are income tax-free and IRS penalty-free if you satisfy two conditions. First, the plan must have been opened for at least five years, and second, the withdrawal must be made for one of the following reasons:
|When must funds be withdrawn?||The year in which you turn 70½, you must begin to take required minimum distributions (RMDs) or tax penalties will be imposed.||Unlike the traditional IRA, the Roth IRA does not require you to withdraw funds at age 70½. There are special requirements when these plans pass to beneficiaries.|
|Are there penalties for early withdrawals?||If you withdraw funds before age 59½, there is a 10% early distribution penalty unless you qualify for an exemption. Exemptions are allowed for disability, qualified medical expenses, qualified education expenses, qualified first time home purchase, qualified health insurance expenses, or death. The bank may impose an early withdrawal penalty depending on the type of account.||
Withdrawals of earnings for reasons other than those listed above are subject to taxation and a 10% IRS penalty on the amount withdrawn. The IRS penalty may be waived for these exceptions:
Interest earned and withdrawals are income tax-free and IRS penalty-free when used for qualified reasons.