Investing in a Roth IRA vs. a traditional IRA


Tax season is an ideal time to review your retirement savings accounts to ensure that you are maximizing tax-advantaged investment opportunities, making the most of your contributions and reviewing your investments to determine if your assets are still properly allocated across all accounts. A powerful and sometimes overlooked vehicle for retirement savings is the IRA. Even if you’re contributing to a 401(k) or other plan at work, you should also consider investing in an IRA.

There are two major types of IRAs, Traditional IRAs and Roth IRAs. Both feature tax-deferred growth of earnings and both allow you to contribute as much at $5,500 in 2013 ($5,000 in 2012). Taxpayers age 50 and older can made additional “Catch-Up” contributions and can contribute up to $6,500 in 2013 ($6,000 in 2012)

Traditional IRA

Almost anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned. However, your ability to deduct traditional IRA contributions will depend on your annual income, your filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. Any distribution from a traditional IRA will be subject to income taxes to the extent that the distribution represents earnings and deductible contributions. You may also be hit with a 10 percent early withdrawal penalty if you draw money out before age 59½ (there are exceptions to this rule). Beginning at age 70½, you must begin to take annual distributions from a traditional IRA.

Roth IRA

With a Roth IRA, no age limitation applies to contributions. As long as you have taxable compensation and qualify, you can contribute to a Roth IRA even after age 70½. However, your ability to contribute and the amount you’ll be able to contribute (up to the annual limit) will depend on your income and tax filing status. Although Roth IRA contributions are not tax deductible, Roth IRAs have other advantages. You’re not required to take distributions from a Roth IRA at any age, which gives you more estate planning options. Another key strength: Qualified withdrawals will avoid both income tax and the early withdrawal penalty if certain conditions are met. Nonqualified withdrawals will be taxed and penalized only on the earnings portion of the withdrawal, since the principal is your own after-tax money.

Your personal goals and circumstances will determine which type of IRA is right for you. If you wish to minimize taxes during retirement or preserve assets for your heirs, a Roth IRA may be the way to go. A traditional IRA may make more sense if you can make deductible contributions and want to lower your taxes while you’re still working.

Article contributed by Jason Codrea, Financial Advisor, Codrea Financial Services – 614-452-8185 or

*The options voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Jason Codrea is a Registered Principal with, and securities are offered through, LPL Financial. Member FINRA/SIPC.

Source: Federated “Should I invest in a Roth IRA or a traditional IRA?” and “Understanding IRAs”