Traditional vs ROTH IRA?

I’m going to assume you are already familiar with the rules around when and how much you can contribute to both ROTH and Traditional IRA’s. If not, CLICK HERE to learn more.

The simple answer is tax timing. Let’s compare and contrast a normal “non-qualified” investment vs. Traditional IRA vs. ROTH IRA.

• With a non-qualified investment, you do not get any tax deduction when you invest, all of the dividends and income will be taxable when received, and all of the gains will be taxable when the investment is sold. “Taxed now, taxed earnings and taxed when sold”
• A traditional IRA receives a tax deduction when you first contribute, all the dividends and income are tax deferred. But, when you want to eventually take income, all the distributions will be taxed as ordinary income. “Deduction now, tax deferred earnings and taxed distributions”
• ROTH is the inverse of traditional, no tax deductions now and all earnings are tax deferred. However, when you go do take distributions it will be 100% tax free. “No deduction, tax free distributions”

In addition to the tax differences, there are a few additional differences. In a standard non-qualified investment account, there are no penalties for early withdrawal, or restrictions around how much you can invest per year. With a ROTH IRA, you can take out your contributions tax free, after 5 years. However, just like with the Traditional IRA, you must wait until age 59 ½ to take out the gains without a penalty. And once you reach age 72, there will be required minimum distributions (RMD) only from the traditional IRA, not from the ROTH IRA.

If you would like to calculate what your personal portfolio might look like with a ROTH IRA vs a Traditional IRA, CLICK HERE to view our ROTH vs. Traditional Calculator. Or CLICK HERE for a more in-depth analysis of which IRA is right for you (LINK).

If you would prefer to have a CERTIFIED FINANCIAL PLANNER™ from Wisdom Wealth Care (Linus A. Whitlock, CFP^® or Logan Whitlock, CFP^®) help you make the calculation about which IRA is right for you, or if you have questions that were not answered, please give send us an email or give us a call. We would be happy to set up a time for a complimentary consultation.