IRA Basics: Roth IRA vs. Traditional IRA
IRA Basics Fund Your Future
At tax time it pays to know the advantages
Getty Images The right IRA can help you grow your retirement savings. An individual retirement account () can provide tax advantages that allow your money to grow faster, giving you more money in retirement. Consider these basics when deciding if putting some money (or more money) in an IRA is right for you. More From Allan
— Receive access to information, benefits and discounts What is an IRA
An IRA is an investing tool used by individuals to earn and earmark funds for retirement savings; it comes in different varieties. The two most common are traditional and Roth IRAs. Traditional IRAs give a tax deduction when you contribute but are usually taxable when you withdraw. Roth IRAs, on the other hand, give no up-front tax deduction but you typically owe no taxes when you withdraw. You can think of a traditional IRA as tax deferred and a Roth IRA as tax free. Which is better for me — a traditional or Roth IRA
In general, if you believe you are at a higher tax rate today than you will be when you withdraw the money, then a traditional is probably better. No one knows future tax rates, however. Mike Piper, author of Taxes Made Simple, recommends investing in both to achieve tax-diversification. There are additional differences, including when funds can be withdrawn without penalties. Ordinarily, a traditional IRA has a 10 percent penalty if withdrawn before age 591/2, and one must start withdrawing shortly after age 701/2. Roth IRAs generally have more flexibility. See also: How much can I put into an IRA
Each person can contribute up to $5,500 annually. If you are 50 or over, you can contribute up to $6,500 each. You must, however, have earned income, such as wages or salary, equal or above the amount contributed. If, for the 2016 tax year, your income is over $117,000 for singles, or $184,000 for married, the amount you can contribute to a Roth IRA is limited. Can my spouse and I each have one Or is the maximum amount limited to a household
You each can contribute to your own IRA. In fact, the earned income rule can be spread to both spouses if you file a joint return. For example, if one spouse didn't work but the other spouse earned $13,000 and both were over 50, each spouse could contribute the maximum $6,500. AARP Discounts
on travel, shopping, dining, entertainment, health needs and more Can I contribute and get a deduction even if I m eligible to contribute to a 401 k retirement plan at work
Yes, but you will get a full IRA tax deduction only if your modified adjusted gross income is below certain limits — typically $61,000 for singles and $98,000 for married filing jointly. If I have a 401 k and an IRA which one should I fund first
First, you almost never want to miss out on any employer matching on your 401(k), so funding up to the amount your employer matches comes first. Beyond that, I typically recommend money go into whichever vehicle has the lowest costs and broadest choices. See also:
Is it too late to contribute and get the deduction for 2016
No. This tax season you have until April 18 to make a contribution and deduct it on your 2016 tax return. Often the tax filing deadline is April 15 of the following year, but it's best to make your contribution earlier. I've always said investing was simple; I never said taxes were. Though there are many exceptions, the answers I've provided to the questions above give you some guidelines to think about and discuss with your tax adviser. Tax breaks are always a good thing, and both traditional and Roth IRAs can be beneficial. Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice. Cancel You are leaving AARP.org and going to the website of our trusted provider. The provider’s terms, conditions and policies apply. Please return to AARP.org to learn more about other benefits. Your email address is now confirmed. You'll start receiving the latest news, benefits, events, and programs related to AARP's mission to empower people to choose how they live as they age. You can also by updating your account at anytime. You will be asked to register or log in. Cancel Offer Details Disclosures
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