Comparing Traditional And Roth IRAs

Apr 17, 2012

By Staff writer State Farm™ Employee

There are many similarities between a Traditional IRA and a Roth IRA, but there are also many differences. The tables below are intended to provide you with brief information to help you determine which IRA might be right for you. For additional information, please refer to the Traditional IRA and Roth IRA articles, or try out our Traditional vs. Roth Calculator.

Eligibility

Traditional IRA Roth IRA
All workers under age 70˝ by the end of the calendar year.

Spousal IRA – spouses under age 70˝ by the end of the calendar year if pre-tax filing status is married, filing jointly. 		Phase out for single MAGI of $112,000 – $127,000 for 2013; $110,000 – $125,000 for 2012.

Phase out for joint MAGI of $178,000 – $188,000 for 2013; $173,000  –  $183,000 for 2012.

A Roth IRA and Spousal IRA are available at all ages.

MAGI – Modified Adjusted Gross Income for federal income tax purposes. See IRS Pub. 590.

Maximum Contribution

Individual:

Tax Year Under age 50 Age 50 or older
2013 $5,500 $6,500
2012 $5,000 $6,000

Although an individual may establish both a Traditional and Roth IRA, total contributions to all IRAs may not exceed the annual contribution limit in effect for the tax year. Annual contributions to Traditional and Roth IRAs may not exceed compensation (including taxable alimony and separate maintenance payments). For a self-employed person, "compensation" means "earned income."

Spousal: For the lesser compensated spouse, the lesser of the amount allowed above for an individual or the combined compensation minus contributions to the spouses' IRAs.

Rollover: No dollar limit or income requirements for Traditional or Roth IRA rollover contributions.

There is no dollar limit or income requirement for rollover contributions.

Federal Income Tax Treatment Of Contributions

Traditional IRA Roth IRA
Fully deductible if not covered by an employer retirement plan, regardless of MAGI.

Nondeductible if both you and spouse are covered by employer retirement plan and MAGI for 2013 is above $115,000 joint or $69,000 single; $112,000 joint or $68,000 single for 2012.

Nondeductible if either you or spouse is not covered by employer retirement plan and MAGI is above $188,000 for 2013; $183,000 for 2012.		 Not deductible (Taxable portion of traditional IRA conversion is taxed currently)

Saver’s Credit – a non-refundable tax credit.

In 2013, you may reduce your tax if your MAGI is less than $59,000 joint, $44,250 head of household, or $29,500 single; in 2012, may reduce your tax if your MAGI is less than $57,500 joint, $43,125 head of household, or $28,750 single.

The credit rate ranges from 50% to 10% of the first $2,000 you contribute; special rules apply.
Saver’s Credit – a non-refundable tax credit.

In 2013, you may reduce your tax if your MAGI is less than $59,000 joint, $44,250 head of household, or $29,500 single; in 2012, may reduce your tax if your MAGI is less than $57,500 joint, $43,125 head of household, or $28,750 single.

The credit rate ranges from 50% to 10% of the first $2,000 you contribute; special rules apply.

MAGI – Modified Adjusted Gross Income for federal income tax purposes. See IRS Pub. 590.

Annual Contribution Deadline

Traditional IRA Roth IRA
Tax-filing deadline for the year, generally April 15th  (without extensions). Tax-filing deadline for the year, generally April 15th (without extensions).

Penalty Tax On Excess Contributions

Traditional IRA Roth IRA
6% 6%

Tax-Deferred Growth

Traditional IRA Roth IRA
Yes Yes

Taxation Of Distributions After Age 59˝

Traditional IRA Roth IRA
Generally subject to federal income tax (unless non-deductible contributions were made). Free from federal income tax for qualified distributions.

Tax-Free Return Of Basis

Traditional IRA Roth IRA
Any basis (non-deductible contribution) is received as a portion of each distribution. Basis (non-deductible contribution) removed first, tax-free.

Conversion basis subject to possible penalty tax if withdrawn within 5 years of conversion.

Required Distributions

Traditional IRA Roth IRA
April 1 of the year following the year of attainment of age 70˝. No required distributions except in the case of death.

Penalty Tax On Insufficient Withdrawals After Age 70˝

Traditional IRA Roth IRA
50% of amount that should have been withdrawn. Not applicable.

Distributions Before Age 59˝

Traditional IRA Roth IRA
Generally taxable and subject to 10% penalty tax unless an exception applies. Any gain taxable and subject to 10% penalty tax unless an exception applies. (Conversion basis may be subject to 10% penalty tax if withdrawn within 5 years of conversion.)

Certain Exceptions To 10% Penalty Tax

Situation Traditional IRA Roth IRA
First-Time Home Buyer Generally taxable, but up to $10,000 penalty-tax free. Up to $10,000 penalty-tax free. If after 5 years, up to $10,000 also received tax free.
Qualified Higher Education Expenses Generally taxable but not subject to 10% penalty tax. Any gain taxable but not subject to 10% penalty tax.
Death Or Disability Generally taxable but not subject to 10% penalty tax. Penalty-tax free. If after 5 years, distributions are also tax free.


Neither State Farm nor its agents provide tax or legal advice. Please consult your own adviser regarding your particular circumstances.

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