There are many different ways an individual can save their hard-earned money for
retirement one day. A very popular retirement investment is what’s called an individual
retirement account (IRA), or more commonly known as a Traditional IRA. This type of
account allows an individual with taxable compensation (an income) to contribute some of
that income towards their retirement. There are several different types of IRAs, but besides
a Traditional IRA, another popular IRA is a Roth IRA. Traditional IRAs and Roth IRAs
have a lot in common, but also have different requirements to keep. The purpose of this
paper is to compare and contrast a Traditional IRA and Roth IRA to determine which type
of account is better suited for an individual.
The United States’ IRS website provides a side-by-side, detailed table outlining the
similarities and differences between Traditional and Roth IRAs. The table on this website
breaks down differences between these two types of IRAs by running down a few
questions that many individuals have when deciding to pick between a Traditional IRA and
a Roth IRA. It’s an easy-to-read table suitable for all ages looking for retirement accounts
to invest their income into.
The first question on the table, and perhaps most important to note, is who can contribute
to these accounts? An individual can contribute to a Traditional IRA if they “have taxable
compensation but not after you are age 70.5 or older” (IRS). A Roth IRA, on the other
hand, allows an individual with taxable compensation to contribute to this account if “your
modified adjusted gross income is below a certain amount” (IRS). This amount changes
from year to year based off of economic conditions, like inflation. For the year 2016, a
single individual’s income has to be less than $117,000 to maximize the contribution limit.
If a single individual’s income is higher than that, a reduced amount can be contributed.
Another difference between these accounts is if contributions are tax deductible. For a
Traditional IRA, an individual can deduct contributions if they “are covered by a
retirement plan at work and your income exceeds certain levels” (IRS). If an individual
doesn’t have a retirement plan at work, they can deduct their IRA contributions. However,
for a Roth IRA, an individual’s contributions aren’t deductible. Since these two accounts
are for planning retirement, there are also differences between the required minimum
distribution takings. An individual with a Traditional IRA “must start taking distributions
