Roth vs Traditional IRA Contributions

Roth vs Traditional IRA Contributions

One of the few things that you can still do (to possible reduce your tax bill) even after December 31st is make an IRA contribution – note that deductibility is dependent on your income level and your eligibility for other retirement plans.

A very common question is whether one should contribute to a Roth IRA or to a traditional IRA. A Roth IRA is not deductible, but it does allow for withdrawals without penalty at a future date prior to reaching age 59 ½. It does not require mandatory distributions at age 70 ½ and is withdrawn tax-free. Traditional IRAs have severe restrictions on withdrawals prior to age 59 ½. An excise tax of 10% (sometimes called a penalty tax) is mandatory if monies are withdrawn before 59 ½ and don’t meet specific exceptions. Additionally, you are taxed on the monies withdrawn at your current tax rate and computed minimum distributions are mandatory at age 70 ½.

The deciding factor in determining whether to contribute to a Roth IRA or a Traditional IRA is generally based on whether you can do without the tax break right now. The Roth IRA has no tax break in the year of the contribution, however, it’s more flexible in that you can withdraw your contributions penalty and tax free. The Traditional IRA in many instances (depending on income levels) will provide a year of contribution deduction but must follow specific rules for withdrawals, penalties may apply and required distributions upon reaching age 70 ½. Each of you must look at your specific situation. I will gladly review your situation with you if you plan to make a contribution and need assistance with your decision.