• Roth IRA vs Traditional IRA

Frequently Asked Questions 

Which IRA is right for you?

There are important differences between a traditional Individual Retirement Account (IRA) and a Roth IRA — and your choice depends on factors such as your age, current income, distribution goals and tax objectives. Both types of IRAs can help you enhance your total financial picture and potentially build wealth for retirement.

 

What are the differences between a Roth and Traditional IRA?

 

Traditional IRA Differences

In general, almost anyone with earned income is eligible to contribute to a traditional IRA.1 By contributing to a traditional IRA, your assets have the opportunity to grow tax-deferred, and distributions taken once you turn age 59½ generally are taxed as ordinary income. (See the What features do both IRAs share? section for information regarding a 10% additional federal tax that may apply if you take a distribution before you turn age 59½.) Your contributions may be tax-deductible, depending on your tax-return filing status, your modified adjusted gross income and whether you or your spouse are eligible to participate in employer-sponsored retirement plans.

 

You must begin to take Required Minimum Distributions (RMDs) from traditional IRAs in the year in which you reach age 70½. You must take your required minimum distribution (RMD) by December 31st of each year. However, for your first RMD, you can wait until April 1st of the year following the year you turn age 70½. If you do that, you will be required to take two distributions in that year.2

 

Roth IRA Differences

To be eligible to contribute to a Roth IRA, your Modified Adjusted Gross Income (MAGI) must be below specified limits. If you are eligible, your annual contributions are made with after-tax dollars and are not tax-deductible. (See the Eligibility section in the chart for detailed eligibility requirements and MAGI limits.) However, you are not required to pay federal (and possibly state) income tax on distributions of earnings if you have had a Roth IRA open for at least five years and are age 59½ or older, or you meet another exception. Contributions can be withdrawn at any time. The original account owner is never required to take RMDs from a Roth IRA. 

What features do both IRAs share?

 

Build wealth for your retirement

• The contribution limits for both types of IRAs may increase due to cost-of-living adjustments in future years. Your annual contribution can be made at any time during a particular year or as late as that year’s federal tax-return due date in April of the following year.

 

Diversify your portfolio

• Ability to choose from a wide range of investments, including stocks, bonds and mutual funds.

• Ability to rebalance the investments in your account regularly without generating any current tax liability. Asset allocation, diversification and rebalancing do not assure a profit or protect against loss in declining markets.

 

Careful consideration should be given to potentially tax-advantaged investments held in your IRA

• Tax-exempt investments, such as municipal bonds, would be subject to tax at the time of withdrawal from a traditional IRA, because IRA distributions generally are taxable regardless of whether certain investments held in your account are otherwise tax-exempt.

• Dividends and earnings on investments in foreign securities and foreign mutual funds may be subject to foreign withholding taxes. A U.S. foreign tax credit may not be available for those foreign withholding taxes on investments in an IRA because there are no U.S. taxes owed until a distribution is made. As a result, the effective yield on foreign securities and foreign mutual funds held in your IRA may be lower than the effective yield of identical investments held in a nonretirement account.

• You may find it preferable to hold tax-exempt or foreign investments in a taxable investment portfolio, should you have one, instead of your IRA.

• Due to the potential generation of unrelated business taxable income, you generally should consider holding any interest in a flow-through entity (such as a partnership, limited liability company, or master limited partnership) in your taxable investment portfolio, not in your IRA.

 

Please consult with your tax advisor if you have questions regarding potentially tax-advantaged investments and your specific tax situation.

 

Understanding withdrawal rules and the early-withdrawal tax

• Taking distributions from traditional IRAs before you reach age 59½ generally will result in not only ordinary income tax, but also a 10% additional federal tax. Exceptions to this additional tax include, but are not limited to, withdrawing assets to buy your first home or to pay for qualified higher education expenses. The 10% additional federal tax may apply to the taxable portion of early withdrawals from a Roth IRA.

• You also can withdraw substantially equal periodic payments (SEPPs) from your IRA, calculated using one of three methods, without incurring the 10% additional federal tax. These distributions are still taxed as ordinary income and must continue for the longer of five years or until you reach age 59½.4

• IRS Publication 590 provides more details if you need to take an early distribution. You should consult your own tax advisor before taking such a distribution.

  • What is a Roth IRA conversion?

     

    A Roth IRA conversion occurs when you distribute assets from an eligible pre-tax retirement account (such as a traditional IRA or a pre-tax account in an employer-sponsored retirement plan) and roll them into a Roth IRA, either directly or within 60 days of the distribution. Through the conversion, the assets in the Roth IRA become after-tax assets that may create tax-free retirement income for you and potentially for your beneficiaries. 

     

    There are important tax considerations to understand and evaluate before beginning a conversion. Talk to your tax advisor and financial advisor before taking any distributions from an IRA or your employer-sponsored retirement plan.

     

  • How does a Roth IRA conversion work?

     

    • Anyone (regardless of income level) can make a conversion, but your ability to make a regular contribution to a Roth IRA is still subject to existing Modified Adjusted Gross Income (MAGI) limitations. 

    • When you convert, you must pay ordinary income tax on any pre-tax assets that you transfer. To help maximize the potential benefits of conversion, the money to pay the tax should come from a source outside your retirement account(s). 

    • If you take a distribution of your retirement assets to pay the associated conversion taxes, that distribution would itself be subject to income taxes and a possible 10% additional tax prior to age 59½. 

    • You can convert part or all of your pre-tax retirement account to a Roth IRA.

     

     

What are the benefits of a Roth IRA?

• A Roth IRA may potentially generate tax-free income for you (or for your beneficiaries after your death).5

• Original account owners are not subject to the RMD rules beginning at age 70½, unlike traditional IRAs. (Beneficiaries are required to take RMDs upon inheritance.)

• Qualified distributions are federal (and possibly state) income tax-free.6

 

When does a Roth conversion make sense?

You may want to discuss Roth conversions with your financial advisor if one or more of the following situations apply to you:

• You expect to be in a higher tax bracket in retirement or you want to diversify the tax status of your portfolio.

• Your current portfolio has declined in value, so converting now could lower the tax obligation based on lower asset values.

• You don’t need the money in your retirement account to pay for living expenses in retirement and you’d like to leave your retirement account assets to your children or other heirs free from federal (and possibly state) income taxes.5

 

Determine which type of IRA is right for you

Traditional IRA or Roth IRA comparison chart

 

TRADITIONAL IRA

ROTH IRA

Eligibility

Individuals under age 70½ with earned income are eligible.

Individuals under age 70½ with earned income are eligible.

Individuals of any age with earned income are eligible.

For 2018:

Single or head of household tax filers

• Full contributions7 with MAGI of less than $120,000.

• Partial contributions with MAGI between $120,000 and $135,000.

Married, filing jointly

• Full contributions7 with MAGI of less than $189,000.

• Partial contributions with MAGI between $189,000 and $199,000.

Married, filing separately

• Partial contributions with MAGI between $0 and $10,000.

 

For 2019:

Single or head of household tax filers

• Full contributions8 with MAGI of less than $122,000.

• Partial contributions with MAGI between $122,000 and $137,000.

Married, filing jointly

• Full contributions8 with MAGI of less than $193,000.

• Partial contributions with MAGI between $193,000 and $203,000.

Married, filing separately

• Partial contributions with MAGI between $0 and $10,000.

Tax Deductibility of Contributions

Contributions are tax-deductible if neither you nor your spouse are eligible to participate in an employer-sponsored retirement plan.8 If you and your spouse are eligible to participate, the deductibility limits are as follows:

For 2018:

Single and head of household tax filers

• Full deduction with MAGI of $63,000 or less.

• Partial deduction with MAGI more than $63,000 but less than $73,000.

Married, filing jointly

• Full deduction with MAGI of $101,000 or less.

• Partial deduction with MAGI more than $101,000 but less than $121,000.

Married, filing separately

• Partial deduction with MAGI between $0 and $10,000.

Nondeductible contributions also are permitted.

 

For 2019:

Single and head of household tax filers

• Full deduction with MAGI of $64,000 or less.

• Partial deduction with MAGI more than $64,000 but less than $74,000.

Married, filing jointly

• Full deduction with MAGI of $103,000 or less.

• Partial deduction with MAGI more than $103,000 but less than $123,000.

Married, filing separately

• Partial deduction with MAGI between $0 and $10,000.

Nondeductible contributions also are permitted.

Contributions are not tax-deductible.

Taxation of Earnings

Earnings will not be taxed until withdrawn.

Earnings will not be taxed until withdrawn.

Earnings are subject to tax only if they are not part of a “qualified distribution.” See Early-Withdrawal Tax below.

Taxation of Distributions

Withdrawals composed of earnings and deductible contributions are subject to ordinary income tax (and possibly a 10% additional federal tax for early withdrawal).

Qualified distributions are free of federal (and possibly state) income tax.6

Required Minimum Distributions (RMDs)

You must begin to take Required Minimum Distributions (RMDs) from traditional IRAs in the year in which you reach age 70½. You must take your required minimum distribution (RMD) by December 31st of each year. However, for your first RMD, you can wait until April 1st of the year following the year you turn age 70½. If you do that, you will be required to take two distributions in that year.

None are required during the lifetime of the original account owner.

No Requirement Minimum Distributions (RMDs) are required during the lifetime of the original account owner.

Early-Withdrawal Tax

Distributions before age 59½ may be subject to a 10% additional federal tax on the taxable portion of the distribution, in addition to any ordinary income tax. Exceptions to this general rule include, but are not limited to, distributions for a first-time home purchase, qualified higher education expense, the account owner's death or disability, IRS levy, SEPPs and certain medical expenses.

Distributions before age 59½ may be subject to a 10% additional federal tax on the taxable portion of the distribution, in addition to any ordinary income tax. Exceptions to this general rule include, but are not limited to, distributions for a first-time home purchase, qualified higher education expense, the account owner's death or disability, IRS levy, SEPPs and certain medical expenses.

 

How can you get started with an IRA?

If you’re seeking a potentially tax-advantaged way to invest for retirement, it’s helpful to speak with a financial advisor to discuss whether a traditional or Roth IRA is appropriate for you. If you have a large account balance in a traditional IRA or former employer’s retirement account, your financial advisor can work with you and your tax advisor to help you evaluate whether a Roth conversion makes sense for your personal situation.

 

Unless you choose a Merrill Edge Self Directed account, your financial advisor can help you develop investment strategies that fit your individual financial circumstances and needs, including your risk tolerance, investment time horizon and liquidity requirements.

 

Get the right guidance for you. Connect with an advisor and start a conversation about your goals.