Looking for a different retirement plan other then 401(k)s or 403(b)s offered by employers. There are also Traditional IRA’s and Roth IRA’s. The difference between each come down to the income limits, the tax incentives, and the withdrawal rules.
To contribute an individual must be younger than 70 1⁄2 and be earning an income. Whether the contribution is deductible depends on if the taxpayer or spouse (if married) is covered by a retirement plan through their job, such as a 401(k).
For a Roth IRA there is not an age restrictions, but they have an income restriction. If someone made less than $133,000 in 2017 as a single taxpayer, they can contribute to a Roth. For married filing jointly, the gross income is $196,000 in 2017.
The contributions are tax deductible in the year that they were contributed. Then as withdraws are made from the account, it is taxed at the ordinary income tax rate.
There is not a deduction on the contribution, however, when withdrawing from the account the income is tax-free.
For both accounts, taxes are not paid on the growth of the account funds, as long as the funds stay in the account.
A difference between the IRAs is the time someone must withdraw from the savings. For both the starting collecting age is 59 1⁄2.
An individual must start taking a minimum distribution when they turn 70 1⁄2 even if the funds are not needed at that time. The minimum distribution amount is calculated by the balance in the account and divided by the distributions period.
The money from the account does not need to be withdrawn. However, for a Roth the first distribution made to the account must have been 5 years before withdrawing from the account without a penalty.
A Traditional IRA, can lower the amount of taxable income for that tax year and help some people qualify for different tax incentives such as the child tax credit or student loan deductions.
With Roth IRAs, there are no limits to what the money can be invested in like in a traditional one. Also with the Roth the withdrawing is tax-free before the age of 59 1/2.
With both a Traditional and a Roth, up to $10,000 can withdrawn for a qualified first-time home buyer expenses if the individual is under 59 1/2 .