Roth & Traditional IRAs: Key Differences and Tax Implications
Individual Retirement Accounts (IRAs) are a popular way for individuals to save for retirement. The two primary types are Traditional IRAs and Roth IRAs, each with distinct tax rules and benefits. Understanding the differences is essential for effective retirement planning.
Traditional IRA
- Contributions: May be tax-deductible, depending on income and whether you or your spouse are covered by a retirement plan at work.
- Taxation: Distributions are taxed as ordinary income in retirement.
- Required Minimum Distributions (RMDs): Must begin at age 73 (for those born after June 30, 1953).
- Contribution Limits: For 2025, the limit is $7,000 ($8,000 if age 50 or older).
- Eligibility: Anyone with earned income under certain income thresholds can contribute.
Roth IRA
- Contributions: Made with after-tax dollars; not tax-deductible.
- Taxation: Qualified distributions (after age 59½ and at least 5 years since first contribution) are tax-free.
- RMDs: Not required during the owner’s lifetime.
- Contribution Limits: Same as Traditional IRA: $7,000 ($8,000 if age 50 or older) for 2025.
- Income Limits: Contributions are phased out for higher-income taxpayers.
Key Differences
- Tax Treatment: Traditional IRA offers tax deferral; Roth IRA offers tax-free growth and withdrawals.
- RMDs: Traditional IRAs require RMDs; Roth IRAs do not.
- Conversion: You can convert a Traditional IRA to a Roth IRA, but the converted amount is taxable in the year of conversion.
- Early Withdrawals: Both types may incur a 10% penalty if withdrawn before age 59½, unless an exception applies.
Reporting Requirements
- Distributions from Traditional IRAs are reported on Form 1099-R, with box 1 showing the total distribution and box 2a showing the taxable amount.
- Roth IRA distributions are reported on Form 1099-R, with box 1 showing the total distribution and box 2a left blank unless it’s a recharacterization or revocation.
- Use Code J, Q, or T in box 7 of Form 1099-R for Roth IRA distributions.
Additional Resources
For detailed guidance on IRA rules, contributions, distributions, and conversions, refer to IRS publications and forms. These resources provide worksheets and step-by-step instructions for calculating taxable amounts and determining eligibility.
Source:
Publication 590-B (2025)
Publication 590-A (2025)
Form 1099-R
Disclaimer: Always verify details with the official IRS forms and instructions or consult a tax professional. OLT (Online Taxes) provides guidance based on current IRS publications and forms. Tax rules may change annually.