Differences Between a Roth IRA & IRA

With both Roth and traditional IRAs, you can contribute up to $5,000 a year of earned income, with an additional annual $1,000 catch-up contribution once you reach age 50. Those are the similarities, but there is a world of differences. Decide which IRA investment works best for you -- or split the difference and contribute to both, if you qualify. That means an annual contribution limit of $2,500 or $3,000 per type of IRA.

Taxes

Traditional IRAs contributions, made with pre-tax money, are tax-deferred investments. When you begin making withdrawals you must pay taxes on the distributions as ordinary income. Roth IRA contributions, made with post-tax dollars, are tax-free upon withdrawal.

Withdrawals

You can begin making withdrawals without penalty from either traditional or Roth IRAs at the age of 59 1/2. If you withdraw any money from a traditional IRA or earnings from a Roth IRA before this age, you could be subject to a 10 percent penalty on top of any income taxes you owe. You must start withdrawing money from a traditional IRA at age 70 1/2, while there is no mandatory age for Roth IRAs. With a Roth IRA, if you don't need the money, you don't have to make any withdrawals.

Deductions

Because you are making Roth IRA contributions with money that has already been taxed, you can't deduct these contributions on your income tax return. You can deduct traditional IRA contributions if you are not covered under a qualified employer-sponsored retirement plan, such as a 401(k). Even if you participate in an employer-sponsored plan, you can deduct your contributions if meeting income limits. As of 2012, a single filer can take a full deduction if his adjusted gross income is under $58,000, and a partial deduction up to $68,000. For married couples filing jointly, the full deduction is available up to an adjusted gross income of $92,000 and a partial deduction up to $112,000.

Older Workers

Not only must you begin taking required mandatory contributions from a traditional IRA by the age of 70 1/2, you can't contribute additional money to it, even if you are still working. With a Roth IRA, you can continue to make contributions no matter how old you are, as long as you still have earned income and meet the income limits.

Income Limits

While you can only deduct a traditional IRA up to a certain income limit if you are covered by an employer-sponsored retirement plan, you can still make contributions no matter how much money you earn. That's not true of Roth IRAs. As of 2012, single filers can only fully contribute to a Roth IRA if the adjusted gross income is less than $110,000, and can make a partial contribution up to $125,000. For married couples filing jointly, the limits are an adjusted gross income of $173,000 for the full contribution and $183,000 for a partial contribution.

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