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Individuals often face a variety of questions as they explore the different types of retirement accounts and consider their options. How do you know which will be best for you?
Understanding the similarities and differences between a Traditional IRA and a Roth IRA can help you decide which individual retirement account may be best for you as you plan and save for retirement.
To help you better understand how a Roth IRA and Traditional IRA compare, review a few of the most commonly asked questions.
Comparing Roth IRAs & Traditional IRAs
How do I know if I’m eligible to contribute to a Roth or Traditional IRA?
Roth IRA – Generally, if you receive taxable compensation in a given year, you may make an out-of-pocket contribution to a Roth IRA as long as you fall within the income restrictions outlined by the IRS and discussed below.
Traditional IRA – Generally, you may make an out-of-pocket contribution to a Traditional IRA if you receive taxable compensation.
Note: As outlined in IRS Publication 590-A, taxable compensation for the purposes of an IRA includes wages, salaries, commissions, net income from self-employment, etc. It does not include earnings and profits from property, interest and dividend income, pension or annuity income, etc.
What are the income limits for IRAs?
Roth IRA – The IRS sets modified adjusted gross income (MAGI) limits each year that dictate eligibility for Roth IRA contributions. The limits depend on your filing status and determine if you are eligible for a full or partial contribution, or if you are ineligible to contribute to a Roth IRA that year (2020 MAGI limits).
Traditional IRA – There are no income limitations to contribute to a Traditional IRA.
Note: The amount you can contribute in a given year cannot exceed the yearly contribution limits set by the IRS or the amount of your taxable compensation earned in the year you are contributing.
Are there age limits for IRAs?
Traditional IRA & Roth IRA – You can contribute at any age as long as you have earned income.
How much can I contribute to an IRA?
Traditional and Roth IRA contribution limits are outlined below. As discussed earlier, Roth IRA contribution limits may be lower based on your earned income.
Traditional IRA & Roth IRA– For 2020 and 2021, if you’re under age 50, you can contribute up to $6,000. If you’re age 50 or older, you can contribute up to $7,000.
Note: The annual contribution limits set by the IRS are for total contributions to all of your Traditional and Roth IRAs, combined, and contributions cannot be more than your taxable compensation for the year.
Can I contribute to a Traditional or Roth IRA if I’m covered by a retirement plan at work?
According to the IRS, you can contribute to an IRA (Traditional and/or Roth) even if you participate in an employer-sponsored plan, including a SEP or SIMPLE IRA plan.
What is the contribution limit deadline for IRAs?
The deadline for contributing to both a Traditional and Roth IRA is the tax filing deadline for the year of the contribution. The deadline to contribute for the 2020 tax year is April 15, 2021.
Can I deduct IRA contributions on my tax return?
Roth IRA – You cannot deduct your Roth IRA contributions because contributions to a Roth IRA are made with after-tax dollars.
Traditional IRA – You may be able to deduct a portion or all of your Traditional IRA contributions. The IRS outlines the deduction allowances according to your income range and filing status, depending on whether either you and/or your spouse are covered by a retirement plan at work.