Traditional vs. Roth IRA

Traditional IRAs, which were created in 1974, are owned by roughly 37.0 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 18.6 million households.

Tip: Not Quite Anything. IRAs are free to invest in just about anything except collectibles like artwork, rugs, antiques, gems, stamps, and coins, for example.

Both are IRAs. And yet each is quite different.

Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the account. Distributions from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

For individuals covered by a retirement plan at work—or for those whose spouse is covered by a retirement plan at work—the deduction for a traditional IRA in 2012 is phased out for incomes between $92,000 and $112,000 for married couples filing jointly, and between $58,000 and $68,000 for single filers.

Also within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.

Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2012, contributions to a Roth IRA are phased out between $173,000 and $183,000 for married couples filing jointly and between $110,000 and $125,000 for single filers.

In addition to contribution and distribution rules, there are limits on how much can be contributed to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $5,000 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $1,500 in that same year.

Fast Fact: Wealthy Owners. The higher your income is, the more likely you are to have an IRA. In 2011, 74% of wealthy households—those with incomes of $200,000 or more—owned an IRA. Source: Investment Company Institute, 2011

Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $6,000. For 2013,
contribution limits increase by $500 for both under age 50 and over age 50 to $5,500 & $6,500 respectively.

If you meet the income requirements, both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: open an account. Please give me a call to discuss the best choice of IRA account for you.

Ken Earwood is a professional financial advisor with more than 18 years of experience serving clients in the financial service industry. CA Lic. #: OC44710. He can be reached at 16531 Bolsa Chica St. Ste. 304 HB, CA 92649. E-mail: or call (714) 840-9283, ext. 2. Securities offered through Sammons Securities Co., LLC. Member FINRA/SIPC.

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