Roth and traditional retirement accounts are two popular types of retirement savings plans that offer different tax advantages. Here is a breakdown of the key differences between the two:
Contributions: With a traditional retirement account, such as a Traditional IRA or a 401(k), contributions are made with pre-tax dollars, meaning you can deduct the contributions from your taxable income in the year they were made. With a Roth retirement account, such as a Roth IRA or a Roth 401(k), contributions are made with after-tax dollars, meaning you cannot deduct the contributions from your taxable income.
Taxation: With a traditional retirement account, withdrawals in retirement are taxed as income. With a Roth retirement account, withdrawals in retirement are tax-free, as long as you meet certain requirements.
Age restrictions: With traditional IRA, you can not contribute to the account if you are 70.5 or older. For Roth IRA, there is no age limit for contributions.
Income limits: Traditional IRA contributions may be limited or phased out for certain high-income earners, while Roth IRA contributions have income limits and may not be available to high-income earners.
Required Minimum Distributions (RMDs): Traditional retirement accounts require you to take required minimum distributions (RMDs) starting at age 72. Roth retirement accounts do not require RMDs during the account holder’s lifetime.
Contribution limits: The contribution limits for traditional 401(k) and IRA are the same, but Roth 401(k) and Roth IRA have different contribution limits.
Eligibility: Not all employers offer Roth 401(k) plans and not all people are eligible to contribute to a Roth IRA based on their income.
In summary, Roth and traditional retirement accounts offer different tax advantages and have different contribution, taxation, age, income limits, and contribution limits. It’s important to understand the rules and benefits of each account and consult with a financial advisor to find the best strategy for your retirement savings.