Traditional IRA vs Roth IRA. They are both contribution retirement accounts. However, they are different. Similar to traditional 401k and Roth 401k,  both have advantages and disadvantages.

Retirement accounts are set up for the purpose to make sure you have enough money when you retire. You can take advantage of tax deductions. However, you should set your emergency fund aside and should not put all of your money in retirement. It is usually hard to withdraw and you may need to pay a penalty for pre-retirement distribution. 

You can split your contribution into both Traditional IRA and Roth IRA. 

What is an IRA?

IRA is an individual retirement account. You open it through banks, brokerage accounts such as Fidelity, Charles Swabs or investment firms. Also, you put your own contribution and make your own investment decisions. You can rollover your retirement account from your previous employer to your IRA after you leave the company.

There are 2 types of IRAs. They are Traditional IRA and Roth IRA.

Traditional IRA

Like traditional 401k, your contribution is a pre-tax contribution. It helps to lower your tax of the year you contribute. In addition, It may help you to qualify for other tax deduction benefits such as child care credit or student loan interest deduction. However, you will pay tax as ordinary income tax on your distributions. It is a choice for you if your tax rate now will be more than later. 

For example: Your salary is $50,000 per year. You decide to contribute 10% of your salary in your traditional 401k. So $5000 will be contributed in your 401k. Your full $5,000 contribution reduces your tax rate for the current year. As a result, you have to pay ordinary income tax on only $45,000.  

You can take advantage of tax benefits today. Since your contribution is not taxed when you contribute, you can have a bigger amount of contribution to invest early that gives a chance for your investment to grow bigger. The beginning investment amount and time may affect your investment. However, you have to pay ordinary income tax for distributions. 

Roth IRA

Like Roth IRAs, your contribution is a post-tax contribution. It is taxed when you contribute. So, it is tax free on distributions. It is a choice for you if your tax rate now will be lower than later. 

For example: Your salary is $50,000 per year. You decide to contribute 10% ( $5,000) of your salary in your Roth 401k. Assume that your tax bracket is 20%. So only $4,000 will be contributed in your 401k and $1,000 is paid for current year tax. 

Your tax rate is the same since your contribution is taxed when you contribute. In this case, you do not take tax benefits for your retirement contribution. 

 Since your contribution is taxed, you have a lower amount of contribution to invest. However, it is tax free on your distributions.

Traditional IRA vs Roth IRA 

2021	Traditional IRAs	Roth IRAs
Tax deduction benefits	Yes, reduce your tax rate of the current year of contribution	No, does not reduce tax rate at current year of contribution
Income eligibility restriction	No restriction	MAGI less than $140,000 for single, and $208,000 for married couples
Contribution age restriction	No age restriction	No age restriction
Contribution	Pre tax contribution	Post tax contribution
Contribution limit	$6,000 if age under 50 and $7,000 if age 50 or above	$6,000 if age under 50 and $7,000 if age 50 or above
Pre-retirement withdraw	10% penalty on early withdraw before age 59 ½  No penalty on Up to $10,000 early withdrawal for qualified first time home buyer expenses or qualified higher education expenses. Permanent disability or some levels of unreimbursed medical expenses that meet IRS criteria	No penalty and tax free on contribution withdrawal any time for any reasons. No penalty and tax free on earning withdrawal:  If your account is at least five years and you have at least one of these circumstances: 59 ½ years old or above, permanent disability, deceased.If your account is at least 5 years, and early withdrawal is qualified for a first-time home purchase. (up to a $10,000-lifetime maximum).Earnings are subject to tax if not a qualified distribution.
Requirement minimum distribution (RMDs)	Required at age 72 ( age 70½, if you were born before July 1, 1949) for account owners. Owner beneficiaries are subject to RMDs requirements.	Not required for account owners Owner beneficiaries are subject to RMDs requirements.
Tax on RMD	Taxed at your tax rate	Tax free

IRA contribution for spouses

if you file a joint return, you can be able to contribute to IRA even though you do not have any taxable income as long as your spouse does. However, your combined contribution cannot exceed your taxable income reported on your filing joint return.

2021 Roth IRA Contribution Limits

Your filing status is married filing jointly or qualifying window(er) and your modified AGI is at least $198,000. You cannot make a Roth IRA contribution if your modified AGI is $208,000 or above.

Your filing status is single, head of household or married filing separately, you did not live with your spouse any time during the year, and your modified AGI is at least $125,000. You cannot make a Roth IRA contribution if your modified AGI is $140,000 or above.

Your filling status is married filing separately, but you lived with your spouse any time during the year, and your modified AGI is more than 0. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or above.

IRA Contributions and Tax Deduction Limits

Roth IRAs are not deductible. However, traditional IRAs deductions are limited if you ( or your spouse if you’re married) are covered by a retirement plan and work and your income exceeds a certain levels.

Traditional IRA deductions if you are covered by a retirement plan at work

Traditional IRA deductions if you are not covered by a retirement plan at work

  Questions and Answers –Traditional IRA vs Roth IRA

1. What is an IRA?

IRA is an individual retirement account. You can open it through banks, brokerage accounts such as Fidelity, Charles Swabs or investment firms. Also, you put your own contribution and make your own investment decisions. After you leave a company, you can rollover your retirement account from your previous employer to your IRA account.

2. Which retirement account can you take tax benefits when you contribute?

Traditional IRA – you can take tax benefits when you contribute. It may help to lower your tax rate at the current tax year of contribution. See the traditional IRA deduction charts above.  However, you pay tax later for distribution. It is a choice for you if your tax rate now is higher than later. 

3. Which retirement account is tax free for distribution?

Roth IRA is tax free for distribution. However, you cannot tax benefits when you contribute because these contributions are post-tax contributions. It is a choice for you if your tax rate now is lower than later. 

4. Does Roth IRA have contribution limits ?

Yes, Roth IRA does have contribution limits. Please see 2021 Roth contribution limits above.

5. Can you take a loan from your IRA?

No, you cannot loan from your IRAs accounts. However, you can withdraw up to $10,000 for a qualified first time home owner. 
No penalty and tax free on Roth IRA contribution withdrawal any time for any reasons. No penalty and tax free on Roth IRA contribution and earning withdrawal if your account is at least five years and you have at least one of these circumstances: 59 ½ years old or above, permanent disability, deceased.

Sources:

Internal Revenue Service. IRA Deduction Limits.

https://www.irs.gov/retirement-plans/ira-deduction-limits. Accessed June 9, 2021.

Internal Revenue Service. Publication 590-A (2020), Contributions to Individual Retirement Arrangements (IRAs).

https://www.irs.gov/publications/p590a. Accessed June 9, 2021.