Learn the differences between traditional IRAs and Roth IRAs
These accounts can help you reach your retirement goals.
As you look ahead to retirement, it’s smart to consider opening an individual retirement account (IRA).
An IRA gives you significant tax breaks that you can’t get with a bank or brokerage account, helping you make the most of the money you put in. You can contribute up to $6,000 to an IRA in 2022—or $7,000 if you’re 50 or older. You must make your annual contributions by the federal tax deadline in mid-April of the following year. (Check IRS.gov for each year’s filing date.)
Here’s a look at the two main types of IRAs and what they can do for you
Traditional IRA
Contribute and save tax-deferred until you’re ready to use that money. You may be able to deduct your contributions from your income taxes.
Eligibility
You can open an account if you or your spouse is under the age of 70 ½ and either of you earn taxable income.
Taxes
- You aren’t taxed on the contributions or earnings in your account until you withdraw the funds in retirement, so your savings can compound each year tax-deferred.
- Your contributions may be partially or fully tax-deductible, which saves you money by lowering your taxable income now.
- Withdrawals prior to age 59 ½ may be subject to a 10% penalty unless you qualify for an exemption.
Withdrawal requirements
You’re required to make minimum yearly withdrawals after you turn 70 ½.
Roth IRA
Roth IRAs allow you to contribute already-taxed income. When you’re ready to withdraw, you won’t be taxed.
Eligibility
- You can open a Roth at any age as long as you have taxable income, which includes wages, salaries, tips, bonuses, commissions, and self-employment income.
- If your taxable income is less than the contribution limit, you can only contribute up to your taxable income amount.
Taxes
- There are no up-front tax deductions for your contributions.
- Your contributions and earnings can grow tax free each year.
- You’re not taxed when you withdraw the funds in retirement.
- Withdrawals made within a 5-year waiting period or prior to age 59 ½ may be subject to a 10% penalty unless you qualify for an exemption.
Withdrawal requirements
There are no withdrawal requirements within your lifetime.
