IRA vs Roth IRA: Whats the difference
Link Posts: Approved Professional: J Diane Robinson, CLTC®

IRA vs Roth IRA: Whats the difference

IRA – Individual Retirement Account

  • A retirement account that allows you to save for retirement On either a tax-free or tax deferral basis
  • There are three different types of IRAs.
    • A traditional IRA can be deductible or non-deductible. 
      • Deductible IRA means that you are making contributions on a tax-deferred – pretax basis.
      • A non-deductible traditional IRA means you are making contributions on a non-deductible or after-tax.
  • Example: 
    • Pre-tax IRA: If your wages are $50k and you want to put $5k into a pre-tax IRA, then the $5k will not be reported as income for you. So, you are paying taxes on $45,000 of income.
    • Non-deductible IRA: If your wages are $50k and you want to put $5k into a nondeductible IRA, then it’s after tax, which means you have to pay taxes on it. Meaning the $50k will be on your tax return taxes as taxable income.
  • Taxes are paid on earnings and contributions when a withdrawal is made.
  • If you withdraw before age 59.5, you might have to pay taxes on your earnings, plus an additional 10% tax.

Roth IRA

  • A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars.
  • Earnings can be withdrawn federally tax-free and penalty-free provided it has been five years since your first contribution.
  • If you make a withdrawal before age 59.5, you might have to pay taxes on your earnings, plus an additional 10% tax.

Rollovers

  • A Roth IRA rollover or conversion shifts money from a traditional IRA or 401(k) into a Roth IRA.