Traditional vs. Roth IRA Calculator
Roth IRAs offer the potential for tax-free earnings, learn more with our traditional vs roth IRA calculator.
Rate at which returns in taxable accounts are taxed may impact results. Factors such as, but not limited to, type of tax deferred investment vehicles available, contribution limits, deductibility of contributions and early withdrawal penalties may impact results and determination in choosing the most appropriate tax-deferred investment vehicle.
Results are not a complete assessment of all factors required to make a final decision. Contact one of our investment advisors for more complete information based on your personal circumstances
All About IRAs (Individual Retirement Account)
An IRA is an Individual Retirement Account, a personal savings plan providing tax-deferred gains and income and the possibility of other income tax advantages as you save money.
IRAs come with many different rules and regulations regarding how much money can be contributed and when it can be withdrawn. Below is a look at the most common IRAs and general rules applying to each type.
Traditional IRA Contributions
Traditional IRAs are most commonly available through banks, investment firms, and mutual fund companies and are generally used by individuals as they save for retirement. Annual contribution limits are regulated by the federal government.
Contributions are currently capped at $5,500 ($6,500 if you’re 50 or older) and can be made until you reach age of 70 ½. The amount of your contribution that’s deductible for income tax purposes depends on your tax-filing status (single, joint, etc.), adjusted gross income and eligibility to participate in an employer-sponsored qualified retirement plan.
With several exceptions (disability, first-time home purchase, etc.), money taken from a traditional IRA before the age of 59 ½ is penalized and taxed.
Roth IRA Contributions
Contributions are not tax-deductible, but earnings accumulate tax-deferred and remain tax-free upon distribution. Contribution eligibility depends on tax-filing status and adjusted gross income. Contributions can always be withdrawn without penalty or tax. Earnings can’t be withdrawn without penalty until after the account has been open five years and you reach age 59 ½.
Because qualifying distributions from Roth IRAs are untaxed, many people favor them over traditional IRAs. Investors may also have converted investments from a traditional IRA to a Roth after deciding the cost of paying taxes on the transfer was outweighed by the prospect of future tax-free distributions.
Rollover IRAs are set up by individuals to receive distributions from any qualified retirement plan.
Distributions to these accounts are not subject to any contribution limits, nor are they taxed when the distribution occurs directly from one plan or account custodian to another.
SEP IRA Contributions (Simplified Employee Pension)
SEP IRAs, or Simplified Employee Pension IRAs, may be utilized by business owners for the purpose of providing retirement benefits to themselves and anyone they employ. Since business owners must offer a SEP to all qualifying employees if establishing one for themselves and annual contributions of up to 25 percent of wages are allowed, SEPs are often used by sole proprietors. Employees qualify for SEP contributions if they: are at least 21 years old, worked three of the past five years for the employer, and earned at least $500 in the prior year.
Contributions to a SEP plan are deductible; they lower a taxpayer’s liability for the current year. Qualifying distributions are taxed at ordinary income tax rates (the same rules as for traditional IRAs).
SIMPLE IRA Contributions
SIMPLE IRAs are relatively new, but becoming more popular because they’re suitable as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. Employers are required to make matching contributions based only on elective contributions by employees or non-elective contributions paid to eligible employees regardless of whether they contribute to their accounts. For a matching contribution, employer contributions may match the employee’s elective contribution up to a certain dollar amount or a percentage of compensation.
Like other employer plans, SIMPLE IRAs allow employers a tax deduction for contributions they make to their SIMPLE IRA plan. Employee contributions to SIMPLE IRAs are not taxed, but distributions are.
Coverdell Education Savings Account
Formerly known as Education IRAs, Coverdell accounts are another option to save money for your child’s college education expenses. These accounts are fairly restrictive as federal law limits contribution eligibility and amounts and the manner in which distributions can be used to retain their favorable tax treatment. Gains and income are tax-deferred. Distributions receive favorable tax treatment when used for authorized expenses.
Other less common IRAs include:
- Individual Retirement Annuities set up with life insurance companies through the purchase of an annuity,
- Employer and Employee Association Trust Accounts are traditional IRAs established by employers, unions or other employee associations for employees or members.
- Spousal IRAs are traditional or Roth IRAs funded by a married taxpayer in the name of a spouse who has $2,000 or less in annual compensation.
Inherited IRAs are traditional or Roth IRAs acquired by non-spousal beneficiaries from a deceased IRA owner. Tax deductions to these IRAs are not allowed, rollovers to or from are not allowed, and proceeds must be distributed within a specific timeframe.
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