Articles on Stock markets

News, Research and Analysis

Help Center
Introduction
Investment Portfolios
Investment Terminology and Instruments
Technical Analysis and Trading
Cryptocurrencies and Blockchain
Retirement
Retirement Accounts401(k) and 403(b) PlansIndividual Retirement Accounts (IRA)SEP and SIMPLE IRAsKeogh PlansMoney Purchase/Profit Sharing PlansSelf-Employed 401(k)s and 457sPension Plan RulesCash-Balance PlansThrift Savings Plans and 529 Plans and ESA
Personal Finance
Corporate Basics

How is a Roth IRA Different from a Traditional IRA?

The most basic difference is that the Roth contributions are made after-tax while the Traditional IRA contributions are usually deductible from income. Both Roth and Traditional IRAs provide for tax-deferred growth of your assets.

However, the contributions you make into your IRA are pretax (or, more accurately, tax-deductible), and contributions you make to your Roth IRA are after-tax. The annual contribution limits for each are usually the same, and, in fact, a person can contribute up to this amount in either of these combined in a given year.

This is assuming someone is eligible to contribute. For Roth IRAs, eligibility is not affected if you or your spouse has a qualified plan at work. The only thing that limits the ability to contribute to a Roth IRA are income limits, which are updated every year.

In a Traditional IRA, the ability to deduct the contributions will be affected if either spouse has a qualified plan at work, and, if so, the individual or couple would have to be under income limits in order to deduct their contributions to the Traditional IRA.

It is possible to contribute to a Traditional IRA without being able to deduct the contributions, and this is known as a non-deductible IRA: it will still grow tax deferred, and the withdrawals will only be partially taxable until the cost basis has been used up.

There is such thing as a Back-Door Roth, which eliminates the income limitation by allowing people to treat contributions as conversions from non-deductible IRAs.

Keywords: taxation, retirement accounts, tax-deferral, contribution limits, back-door Roth, non-deductible IRA,
What are some Good Books on Investment?Do I Need a Will?