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Two types of IRAs: Traditional and Roth Key differences Contribution limits for traditional and Roth IRAsThe bottom line
Different types of IRA

An Individual Retirement Account (IRA) is one of two primary types of tax-advantaged retirement accounts, which are meant to incentivize saving for retirement. The other type is a 401(k), which is an account that must be sponsored by an employer. IRAs are available to everyone, regardless of employment status. 

Under the IRA umbrella, there are two preliminary types of accounts: the traditional and the Roth. Both are subject to the same annual contribution limits and early withdrawal penalties. But they have different eligibility requirements and tax advantages. 

Two types of IRAs: Traditional and Roth

  • Traditional IRAs are tax-deferred retirement accounts that are available to everyone with earned income. They let investors contribute money toward retirement with pretax income, which means they don’t have to pay taxes on eligible contributions in the year they make them. So if they contribute, say, $1,000 in 2021, they can reduce their taxable income by that same amount when they file their federal tax returns for that year. The funds are subject to taxes when they take distributions from their account in retirement, when they’re at least 59½ years old. 
  • Roth IRAs are tax-exempt retirement accounts that are available to eligible participants based on income. They allow investors to contribute money after they’ve paid tax on it, not before. That means they pay income tax on contributions when they’re made, but not when they’re withdrawn in retirement.

Key differences

Here’s a detailed breakdown of the differences between traditional and Roth IRAs.

1. ​​Tax advantages

Traditional and Roth IRAs both have tax advantages, but of different natures. A traditional IRA allows investors to deduct eligible contributions from taxable income when they contribute, but they must pay income tax on their withdrawals in retirement. A Roth IRA doesn’t offer a tax deduction on contributions, but all earnings are tax-free when they’re withdrawn in retirement.

2. Eligibility requirements, income limits, and phase-out limits

Anyone with earned income can contribute to a traditional IRA, but only those who meet the income limits can contribute to a Roth. There are income limits on the tax deduction for a traditional IRA if investors also have access to a workplace retirement plan like a 401(k).  

Traditional IRAs

There are no income limits for contributing to a traditional IRA, but investors’ tax deduction may be reduced or eliminated if they’re also covered by an employer-sponsored retirement plan. If investors are covered by a workplace retirement plan and their annual modified AGI (annual gross income) falls within these ranges, they’ll receive a reduced tax deduction on their traditional IRA contributions: 

  • Single taxpayers: $66,000 to $76,000
  • Married filing jointly: $105,000 to $125,000
  • Not covered by workplace plan, but married to someone who is: $198,000 to $208,000

If investors’ income is above the top end of the range and they’re covered by a workplace retirement plan, they won’t receive any tax deduction on their IRA contributions. 

Roth IRAs

In addition to having earned income, investors must meet the income limits to open and contribute to a Roth IRA. 

  • Single taxpayers: less than $125,000 for maximum contribution
  • Married filing jointly: less than $198,000 for maximum contribution

Investors may still qualify to make smaller contributions if their income is less than $140,000 for single filers and less than $208,000 for married taxpayers filing jointly. 

3. Required minimum distributions

Traditional IRAs come with required minimum distributions (RMDs). Once investors reach age 72, they are required to withdraw funds each year (and consequently, pay taxes on them). They may withdraw more than the RMD.

Since investors don’t have to pay taxes on their Roth IRA withdrawals, the government does not require them to take mandatory distributions at any time. With a traditional IRA, however, they must begin taking withdrawals once they reach age 72. 

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Contribution limits for traditional and Roth IRAs

The maximum contribution limit in 2021 for both traditional and Roth IRAs is either 100% of earned income, or $6,000, whichever is less. Investors may contribute an additional $1,000 each year (for a total of $7,000) once they reach 50 years old. 

Note that these are combined limits across traditional and Roth IRAs. If investors make the maximum contribution to a Roth IRA, they may not invest another $6,000 in their traditional IRA. The $6,000 limit applies to the sum of their contributions to traditional and Roth IRAs.

The bottom line

Both traditional and Roth IRA accounts are subject to the same annual contribution limits and early withdrawal penalties. However, it’s important to note they have different eligibility requirements and tax advantages.

Investing well for retirement is a crucial act. At Titan, our expert investment analysts steward your capital through actively-managed, high growth-potential portfolios. Sign up takes minutes, and our Client Experience team is here to help you step-by-step as you migrate your retirement funds over to Titan. Get started today.


Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see
Titan’s Legal Page for additional important information.

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Investing well for retirement is a crucial act. At Titan, our expert investment analysts steward your capital through actively-managed, high growth-potential portfolios. Sign up takes minutes, and our Client Experience team is here to help you step-by-step as you migrate your retirement funds over to Titan. Get started today.


Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see
Titan’s Legal Page for additional important information.

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