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Traditional IRA vs Roth IRA

Updated: Feb 7

When it comes to IRAs, knowing the right vehicle for your situation can make a world of difference. That's why we've put together a few tips to help you on your journey with DF-Direct.


Contributions

Perhaps the biggest difference between Ttraditional IRAs and Roth IRAs is how and when taxes apply to the contributions and earnings. Contributions to traditional IRAs can be pre-tax (deductible on the taxpayer’s income tax return). Although contributions and earnings accumulate on a tax-deferred basis, income taxes are due when IRA distributions are taken.


On the other hand, contributions to Roth IRAs are made with after-tax dollars, and contributions and earnings accumulate tax free. No income tax is due when distributions are taken from a Roth IRA. For tax year 2024, the maximum contribution to either a traditional IRA or Roth IRA is $7,000 ($8,000 for individuals age 50 or older).



Age Restrictions

Required minimum distributions (RMDs) from Traditional IRAs must begin by April 1 of the year after an individual reaches age 73 (if reached after December 31st, 2022) or a considerable tax penalty may apply. In contrast, Roth IRAs have no minimum distribution requirements.


However, both traditional and Roth IRAs have a minimum age for distributions: 59½. Distributions taken prior to age 59½ may be subject to a 10% Federal income tax penalty. Certain situations qualify as exemptions, such as distributions to pay first-time-home buyer expenses or qualified education expenses. Furthermore, before tax-free distributions can be received from a Roth IRA, the account must be five years old.



Income Eligibility Limits

Spending on your tax-filing status, your income, and whether or not you participate in a qualified employer-sponsored retirement plan, you may be eligible to take an income tax deduction for contributions to a traditional IRA. If you are a single taxpayer, it is often not worthwhile to participate in a qualified employer-sponsored plan, and earn a minimum of $7,000, contributions are deductible regardless of your adjusted gross income (AGI).


However, if you do participate in an employer-sponsored 401(k) retirement plan, income limits apply to contributions to your IRA. Deductions in 2024 phase out for single filers with modified AGIs (MAGIs) between $77,000 and $87,000, and for married couple joint filers with MAGIs between $123,000 and $143,000.




Requirements are different for Roth IRAs. If you participate in a qualified employer-sponsored retirement plan, you may contribute to a Roth IRA; however, if you are also contributing to a traditional IRA, your contributions may not exceed the annual contribution limits. You are eligible to make a full contribution to a Roth IRA if your MAGI in 2024 does not exceed $161,000 for single filers or $240,000 for married joint filers (contributions phase out for single filers with MAGIs between $146,000 and $161,000, and for married joint filers with MAGIs between $230,000 and $240,000).


For a married individual filing separately who participates in a workplace retirement plan, the phase-out range is $1 to $10,000. A Roth IRA is often a favoured choice for those who participate in a qualified employer-sponsored retirement plan and exceed the income limits for a deductible IRA, but who meet the income eligibility requirements for a Roth IRA.


DUNHILL FINANCIAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.

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