IRAs vs Roth IRAs – What’s the Difference?
This is the second of three posts in our “IRA Updates for 2020” blog series which covers recent developments and ongoing strategies for making the most of your tax-deferred savings. In this post, we will break down the different types of IRAs and discuss the various contribution limits for each. Hopefully, this simple explanation brings some clarity to your financial planning efforts.
There are two types of IRAs:
- A Traditional IRA can be created by making deductible, pre-tax contributions and can also be created or supplemented by a rollover from an employee retirement plan (such as a 401K). Since the contributions to these accounts were not taxable when they are made, any distributions from traditional IRA accounts are taxable. There are contribution limits which disallow contributions for higher income taxpayers. However, higher income taxpayers are able to make non-deductible, or after tax contributions. Under the new SECURE Act the taxpayer is required to begin taking required minimum distributions each year once they reach age 72, based on life expectancy.
- A Roth IRA, in contrast, is created by making non-deductible after-tax contributions, so the eventual withdrawals from the account are not taxable to the account holder/taxpayer. In addition, there is no required minimum distribution other than for inherited Roth IRAs. For committed savers, Roth IRAs provide the best of both worlds. Note that both types of IRAs are subject to estate tax. Also, the ability to make a direct contribution to a Roth IRA is restricted to those with lower taxable incomes but see more about Backdoor Roth Strategies here.
For help with contribution limits, please feel free to download a chart of 2020 contribution limits, income limitations and deductibility rules here.
In our next post on this topic, we will discuss additional IRA strategies you should consider for financial success. Stay tuned! If you’d like to make sure you receive the final installment of our IRA blog series, please sign up on this page to join our email notification list. As always, if you’d like to discuss this information in further detail and how it might affect you, please feel free to reach out to the Horizon Wealth Advisors team. We are always happy to help!
Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.