How A Roth IRA Contribution Differs From A Traditional IRA

Over the past two years, many Americans have seen their retirement funds decrease significantly, to the tune of trillions of dollars. The alarm has caused more people to make careful choices about where they place money that is meant for their golden years. One of the good things about this volatile market is people are now more prone to pay attention to all the options available, and give serious consideration to any decision. Two of the more popular investment vehicles are a Roth IRA and traditional IRA.  Understanding the differences between the two will help you make wiser choices, especially knowledge of Roth IRA contribution limits. 

The Roth IRA is an individual retirement arrangement under the United States tax law named for its chief legislator, the senator William Roth. As opposed to a traditional IRA, a Roth IRA contribution is not tax deferrable. Generally, withdrawals from a Roth are tax free, but come with certain stipulations. They also have less restrictions for withdrawal requirements. For example, withdrawals from direct contributions to a Roth IRA are tax free. However, rollover or converted contributions withdrawn before age 59 1/2 are tax and penalty after a five year seasoning period. Withdrawals will be taxed as ordinary income with a traditional IRA, and you will be hit with penalties before age 59 1/2. 

The current contribution limits are the same for both retirement plans: $5,000 for individuals under age 50; $6,000 for anyone 50 or older. Having both plans during the same tax year is acceptable; however, the combined amounts cannot exceed the contribution limit. Contributions made to a Roth IRA are not tax deductible, but are for a traditional IRA within certain income limits. You can receive an immediate tax savings from contributions to the traditional IRA. Eligibility phases out at certain income limits with the Roth, where most employer sponsored traditional plans have no income limit. 

Because of the varying rules between a Roth IRA contribution and the traditional IRA, it is best to seek the advice of a financial planner. Any change in tax laws could cost you more than you anticipated. Additionally, if you are self-employed, there are different rules that will require the assistance of your accountant.