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Individual retirement arrangements come in two main flavors. Both offer tax advantages, but in different ways. Here are answers to the questions people ask when deciding between them.

What is the basic difference?

The difference is when you pay the tax. With a traditional IRA, contributions may be deductible now, the money grows tax-deferred, and withdrawals are taxed as ordinary income. With a Roth IRA, you contribute after-tax dollars, the money grows tax-free, and qualified withdrawals are tax-free.

Which one is better for me?

It depends largely on whether you expect your tax rate to be higher now or in retirement. If you think your rate will be lower later, a traditional IRA may give the greater benefit. If you expect it to be higher, or you value tax-free income and flexibility, a Roth may be the better fit. Many people use both to diversify their future tax exposure.

Who can contribute?

You generally need earned income to contribute to either type. Roth IRA contributions are limited or eliminated at higher incomes, and the deductibility of traditional IRA contributions can be limited if you or your spouse are covered by a workplace plan and your income is above certain levels. The IRS sets the annual contribution limit and the income ranges, so check current figures on irs.gov.

When can I withdraw money?

Early withdrawals from a traditional IRA are generally taxed and may be subject to an additional penalty, with some exceptions. With a Roth IRA, you can generally withdraw your original contributions at any time without tax or penalty, but earnings are taxed and penalized unless the withdrawal is qualified, which generally requires that the account has been open for a minimum period and that you meet an age or other condition.

Do I have to take required distributions?

Traditional IRAs require minimum distributions starting at an age set by law. Roth IRAs do not require withdrawals during the owner's lifetime, making them useful for leaving money to heirs.

Can I convert a traditional IRA to a Roth?

Yes. A conversion is generally taxable on the pre-tax amount converted, so it makes the most sense when you can pay the tax from other funds. A conversion cannot be reversed, so think carefully about timing and the effect on your tax bracket for the year.

Can I contribute to an IRA if I have a workplace plan?

Yes, though the tax benefits may be reduced depending on your income. Many people capture an employer match first, then add IRA contributions.

To decide which approach fits your situation, consider our tax planning services or contact us directly.