While Roth and Traditional IRAs are both excellent choices when saving for retirement, there are many differences to keep in mind:
- Earnings in a Roth IRA are not subject to federal taxes. Earnings in a Traditional IRA are subject to taxes, but taxation is deferred until money is withdrawn in retirement, at which time the earnings are taxed at your current rate.
- Contributions to a Roth IRA can be withdrawn penalty-free at any time. Withdrawals from a Traditional IRA before the age of 59½ are subject to taxes and a 10% federal penalty.
- Anyone with earned income under the age of 72 can contribute to a Traditional IRA. Contributions to Roth IRAs are restricted to those who do not exceed certain modified adjusted gross income limits.
- Traditional IRA contributions may be tax-deductible. Roth IRA contributions cannot be deducted.