Traditional IRA and Roth IRA Comparisons

By • on July 2, 2010 • Filed under: Articles of Interest, Plan Participants, Plan Sponsors

In plain terms, with a Traditional IRA the plan participant makes a tax deductible contribution, meaning the deposit in the traditional IRA isn’t taxed. The deposit and it’s earnings grow tax free for the life of the account.

For example: John is age 32 and his total salary for the year is $35,000. John deposits $5,000 into the traditional IRA during the year. John’s taxable income for that year is 30,000. John does not pay taxes on the $5,000. That $5000 and the earnings from the account grows tax free. When John retires – after age 59 1/2 and starts taking withdrawals the income will be taxed at the ordinary tax rate.

With a Roth IRA the tax treatment is different. The contribution is not tax deductable, meaning any deposit made to the Roth IRA are funded with taxed income. The deposit grows tax free and when withdrawals are made – after age 59 1/2, none of it is taxed assuming the account has been opened for at least five years.

For example: If John makes a contribution to a Roth IRA the deposit will not be tax deductible. Using the example above John would be taxed on the full $35000. When John retires the withdrawals will be tax free.

If you are considering a Traditional or Roth IRA, Schwab has a nifty calculator that may help you decide what works best for you.

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