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What Is the Difference Between a Roth IRA and a traditional IRA?
What these two types of Individual Retirement Accounts (IRAs) have in common is the fact that they are both vehicles to help provide for your long-term financial security. But there are some important differences between the two, as you can see from the following table:
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Traditional IRA |
Roth IRA |
| What kind of plan is this? |
Each type of IRA is a personal retirement savings plan that may give you certain tax advantages. |
| What kind of tax advantages does each plan offer? |
With a traditional IRA, the tax advantages are generally available at the time you make your contributions. That's because your contributions to the plan may be deductible from your income in the year in which you make the contribution. (In addition, the investment earnings on your account are not taxed until distribution.) |
With a Roth IRA, the tax advantages are generally available at the time you withdraw money from the plan. Although your contributions to the plan are not tax deductible, when you withdraw money from the plan, it is distributed to you tax free, as long as you meet certain requirements.* |
| Do I have to have a certain type of income in order to be eligible to contribution to an IRA? |
Yes. For either type of IRA, you—or your spouse, if you file a joint return—must have earned income, such as wages, salaries, commissions, tips, bonuses, or income from self–employment. |
| Are there certain income limits that govern who may contribute to an IRA? |
No. Anyone may contribute to a traditional IRA. Your ability to contribute to a traditional IRA on a tax-deductible basis is limited by whether or not you or your spouse are eligible to participate in an employer-sponsored retirement plan. If so, your contributions are only tax deductible if you meet certain income and tax filing status requirements. |
Yes. You may only contribute to a Roth IRA if you meet certain income and tax filing status requirements. |
| Are there any age limits that govern who may contribute to an IRA? |
To be eligible to contribute to a traditional IRA, you must be under age 70½ at the end of the tax year for which you are making your contribution. |
No. There are no age limits for individuals who wish to contribute to a Roth IRA. |
| How much can I contribute to an IRA? |
In 2008, eligible individuals may contribute up to $5,000 to a traditional or Roth IRA ($6,000 for those individuals age 50 or over). Contributions for the previous year can be made up to April 15th of the following year. |
| Where can I establish an IRA? |
Either type of IRA can be established at a wide variety of financial institutions, such as banks, insurance companies and brokerage firms. |
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The table above provides a very basic explanation of the differences between traditional and Roth IRAs. For detailed information about these personal retirement savings programs, consult your financial professional.
This information has been provided for your benefit and is not intended or designed to e legal or tax advice. Neither Prudential Retirement, nor any of its representatives, may give legal or tax advice.
INST-20080226-A017255
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