Roth vs. Traditional IRAs

Are you trying to decide which type of IRA is best for you? Roth and traditional IRAs are similar in many ways but have different features designed to meet the varying needs of investors. You can compare them in our Roth vs. Traditional IRA Comparison Chart.

Here's a summary of what these two types of IRAs offer and how they differ:

Distributions
In general, a Roth IRA offers more flexibility than a traditional IRA. Traditional IRAs require you to begin taking distributions at the age of 70½. Roth IRAs don't have this requirement and allow you to keep your money in until you need it. (Your heirs can even delay withdrawals for additional years if needed.)

Contributions and Withdrawals
The maximum annual contribution permitted in a Roth IRA is $4,000 for 2007 ($5,000 if you reach age 50 or older in 2007), the same as a traditional IRA, But they differ in the way contributions and withdrawals are taxed.

For example, while contributions to a traditional IRA are deductible from current taxable income, they are not deductible in a Roth IRA. Contributions to a Roth IRA are made after taxes.

With a traditional IRA, you're not taxed until you take distributions. However, early withdrawals before age 59½ may be subject to penalties.

Roth IRA distributions will not be taxed if you make a withdrawal that is considered "qualified." To make tax- and penalty-free withdrawals from your Roth IRA earnings, your IRA has to have been opened at least 5 years PLUS 1 of the following: you have reached age 59½; you're using the funds for a first-time home purchase (up to a maximum of $10,000); or you're disabled.

With a Traditional IRA, you may make withdrawals up to $10,000 penalty-free for a first-time home purchase as well, but you will be taxed. And withdrawals may be made from a traditional IRA penalty-free (but not tax-free) to cover qualified higher education (i.e., post-secondary) expenses of the IRA owner, spouse, children or grandchildren.

Deductible Traditional IRA
You may be able to fully deduct you traditional IRA contribution (up to a maximum of $4,000 for 2006) when:
  • Neither you nor your spouse are covered by an employer-sponsored retirement plan, regardless of your net income; or
  • You are not covered by an employee-sponsored retirement plan and, even though your working spouse is covered, your combined Adjusted Gross Income (AGI) is $150,000 or less; or
  • You (as a single taxpayer) or you and your spouse are covered by an employer-sponsored retirement plan but your AGI falls below the phase-out range shown in the Traditional IRA Deductibility Chart.

The Non-Deductible Traditional IRA
If you do not qualify for either a Roth or a deductible traditional IRA, a non-deductible traditional IRA may still make sense for the long term, allowing you to accumulate returns tax-deferred. Since a non-deductible IRA contribution represents income that has already been taxed, a distribution from a non-deductible traditional IRA is partially tax-free.

Get an IRA Application online or contact your H&R BLOCK Financial Advisor. Or, call 1-866-295-7912 for more information.

We can help you decide which IRA is right for you. Contact your H&R Block Financial Advisor today or visit our office locator to find an advisor near you.

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