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What’s the difference between a traditional IRA and a Roth IRA?

A key difference between a traditional IRA and a Roth IRA is whether the money you contribute is considered taxable in the year you contribute or in the year you take a distribution. The different types of IRA also have different contribution limits based on your income and filing status.

There are many reasons you might choose one type of retirement account over another and we won’t be able to cover everything here. The following information is intended to help you file your taxes with Credit Karma Tax and is not a comprehensive guide to retirement investing. You should seek advice from a qualified financial adviser when making decisions about your investments.

IRA Contributions

Go to this section in Credit Karma Tax: Traditional & Roth IRA Contributions Outside Your Employer

Both Traditional and Roth IRAs have the same maximum contribution limits. You can contribute to one or both types of accounts but the contribution limit applies to the total of all your contributions for the year.

According to the IRS, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older) or your taxable compensation for the year, whichever amount is smaller.
Source: irs.gov

With a traditional retirement account, you may be eligible to deduct your contributions from your taxable income in the year that you contribute. Your filing status, your modified adjusted gross income (MAGI) and whether or not you have a retirement plan through work may affect whether you can take a deduction and how much of a deduction you can actually take.

You also need to consider how long you want to contribute into your account. For a traditional IRA you can't make contributions in the year you reach the age of 70 ½ and after. With a Roth IRA you can make contributions after the age of 70 ½.
Source: irs.gov

AGI Limits for Roth IRAs

You are not eligible to contribute to a Roth IRA if any of the following applies to you:

  • Your filing status is married filing jointly or qualifying widow(er) you can’t make a Roth IRA contribution if your modified AGI is $199,000 or more.
  • Your filing status is married filing separately, you lived with your spouse at any time during the year, you can’t make a Roth IRA contribution if your modified AGI is $10,000 or more.
  • Your filing status is single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year, you can’t make a Roth IRA contribution if your modified AGI is $135,000 or more.

If you already have a Roth IRA and your income falls into a certain range, then your Roth contribution limit may be lowered. Traditional IRAs don’t have these same limits.

Distributions from IRAs

Go to this section in Credit Karma Tax: Form 1099-R

In general, distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the distribution is taxable. If you have ever made a nondeductible contribution to a traditional IRA, file Form 8606.

Distributions from a Roth IRA are not taxed as long as you meet certain criteria. File Form 8606 if you received distributions from a Roth IRA (other than a rollover, qualified charitable distribution, one-time distribution to fund an HSA, recharacterization, certain qualified distributions, or a return of certain contributions).

If you took an early distribution from your IRA you can add it to your tax return and we’ll use that information to determine if you owe additional tax.

Go to this section in Credit Karma Tax: Additional Tax on Early Distributions

For traditional IRAs you’re must start taking out required minimum distributions (RMDs) by April 1 of the year following the year when you reach 70 ½ years old, whether you need the money or not. With a Roth IRA you do not have any required minimum distributions until after the death of the owner.
Source: irs.gov

I contributed to a Traditional IRA but didn't get a tax deduction. Why?

You may not be able to deduct all of your contribution to a Traditional IRA if your modified Adjusted Gross Income (MAGI) is too high.

If you are covered by a retirement plan at work, your maximum deduction starts to reduce (or phase out) if your modified AGI is:

  • More than $101,000 but less than $121,000 for a married couple filing a joint return or a qualifying widow(er), if your modified AGI is $121,000 or more you will not be able to deduct Traditional IRA contributions
  • More than $63,000 but less than $73,000 for a single individual or head of household, if your modified AGI is $73,000 or more you will not be able to deduct Traditional IRA contributions
  • Less than $10,000 for a married individual filing a separate return. If your modified AGI is $10,000 or more you will not be able to deduct Traditional IRA contributions.

If you are not covered by a retirement plan at work, the amount of your deduction starts to phase out when your MAGI is:

  • More than $189,000 but less than $199,000 if you are married filing jointly with a spouse who is covered by a plan at work. If your MAGI is $199,000 or more under this filing status, you cannot take a deduction for traditional IRA contributions.
  • Less than $10,000 if you are married filing separately with a spouse who is covered by a plan at work. If your MAGI is $10,000 or more under this filing status, you cannot take a deduction for traditional IRA contributions.
    Source: irs.gov
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