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3 Differences Between Roth and Traditional IRAs

Filed under: Retirement, Taxes and Planning

Since its introduction in the 1990s, the Roth IRA has become a popular retirement savings vehicle. Much of the Roth’s popularity is due to its unique tax treatment, which differs greatly from that of a traditional IRA. In a traditional IRA, you may benefit from tax deductions for your upfront contributions. Your funds grow tax-deferred as long as they stay in the account. Your distributions from the traditional IRA are then taxed as ordinary income.

In a Roth IRA, there are no deductions for upfront contributions. Your funds still grow tax-deferred as long as they are inside the account. However, Roth IRA distributions are tax-free as long as you are over age 59½ and the account has been open at least five years. That means you can use a Roth IRA today to save money and create tax-free income in retirement.

Tax treatment is the biggest difference between a traditional IRA and a Roth, but it’s not the only difference. Below are three other important distinctions you may want to know before you start saving with a Roth IRA:


Income Limitations for Contributions

Just because you want to use a Roth IRA doesn’t mean you can. Roth IRA contributions are governed by income limitations. If you’re a high earner, you may not be able to contribute to a Roth.

In 2017, married couples who make more than a combined $196,000 can’t contribute to a Roth. Those who make less than $186,000 can contribute up to $5,500. Couples who make between $186,000 and $196,000 can contribute a reduced amount.1

Single filers can contribute the full amount to a Roth if they earn up to $118,000. Contribution limits are then reduced for singles who earn between $118,000 and $133,000, at which point contributions are no longer allowed.1


Tax-free, Penalty-free Contribution Withdrawals

In nearly all qualified accounts, such as IRAs and 401(k) plans, you are not allowed to take distributions before age 59½. Doing so could result in a 10 percent early distribution penalty. This penalty is in place to encourage people to use the accounts for their intended purpose of saving for retirement.

However, the Roth has a unique feature that allows you to take some portion of your funds before age 59½ for any reason. Your Roth contributions are made with after-tax dollars, since you receive no upfront deduction. That means you can withdraw your contributions at any time without paying taxes or an early distribution penalty.

Keep in mind that if you do withdraw your contributions early, you could limit your growth potential in the future. Those dollars will no longer be invested inside the account and won’t have the ability to accumulate. If you really need the funds, however, you could take advantage of this unique rule.



The traditional IRA has what are called required minimum distributions (RMDs) that take effect at age 70½. Once you reach that age, you are required to take a minimum amount from your traditional IRA. The amount is based on your life expectancy and your account balance. As you get older, the percentage of your balance that you’re required to withdraw each year gradually increases.

Roth IRAs don’t have RMDs. Required minimum distributions are in place to ensure that traditional IRA owners pay taxes on their funds. However, Roth IRA distributions aren’t taxable, so there’s no reason to enforce RMDs. With a Roth, you can keep the funds in your account as long as you’d like, and even pass them down as a tax-free benefit to your loved ones.

Ready to create a savings strategy using a Roth IRA? Let’s talk about it. Contact us today at Ambrose Financial and Insurance Services. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.




Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16925 – 2017/8/25