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Traditional vs. Roth: An IRA Comparison

By Blake Skadron, President at iTrustCapitalFebruary 11, 20202 minutes read

With all the different types of IRAs and specific rules of each, it’s no wonder there is so much confusion.  What do you expect from a government-designed program regulated by the IRS? The problem is that it's human nature to avoid things that seem complicated, even if it’s in our best interest to participate. Although there is currently over $9 Trillion in IRAs there is a severe lack of knowledge and awareness of these tax-advantaged accounts.  So instead of going over every detail and term of each let’s cover the two most popular. 

Traditional IRA

  1. Funded with pre-tax dollars just like an employer plan. (401k, 403b, TSP, 457)

  2. Trades within the account do not create taxable events. Buy and sell as much as you want.

  3. The account grows tax-deferred until distributions are taken.

  4. According to the IRS, there is a 10% penalty for distributions taken before the age of 59 ½. Exceptions do occur, learn more here.

  5. Distributions are taxed as income. 

  6. Employer plans

Roth IRA

  1. Funded with post-tax dollars.

  2. Trades within the account do not create taxable events. Buy and sell as much as you want.

  3. The account grows Tax-Free as long as no gains are taken as a distribution until the age of 59 ½ and the account has been established for 5 years

  4. According to the IRS. There is a 10% penalty for distribution of gains before the age of 59 ½. 

  5. The original contribution can be taken as a distribution at any time. The age and 5-year rule do not apply because you have already paid taxes on those funds.

  6. A Traditional or other tax-deferred IRA can be converted to a Roth IRA at any time. 

Final Thoughts

Many Traditional IRAs are funded from rollovers of employer plans and can be sizeable.  Bear in mind you can always do a partial conversion to a Roth IRA and have both types of accounts.  Other questions come up when making a new contribution; some have too high of an income to get a tax deduction for contributing to a Traditional IRA and also, too high of an income to contribute directly to a Roth IRA.  If that is the case, a Backdoor Roth IRA may be the best option.  

At the end of the day, everyone has their own unique situation and must determine which IRA is right for them.  

Disclaimer: I am not a licensed financial or tax advisor — consult with your financial/tax professional to determine what is best for you.