Traditional vs. Roth IRA

1. Do traditional and Roth IRAs have the same contribution limits? What are they?

For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than $6,500 ($7,500 if you're age 50 or older). These contributions have to come from earned income, so the limit my be less if your income is less than these limits.

It’s also important to note that 2022 contributions can still be made until April 18th of 2023 (typically on April 15th). The maximum aggregate contribution for 2022 is $6,000 ($7,000 if you’re age 50 or older).

2. How are traditional IRAs vs. Roth IRAs taxed?
Traditional accounts are what people are typically most familiar with, and they are used to defer income taxes until later years. Roth accounts allow the taxpayer to pay income taxes in the current year, grow the money tax-free, and withdraw the money tax-free. 

3. Can you discuss how income limits affect traditional IRAs vs. Roth IRAs?

Roth IRA contributions are completely eliminated once your household income reaches $153,000 as a single filer or $228,000 as a married couple filing jointly.

For single and head-of-household taxpayers covered by a workplace retirement plan, the traditional IRA phase-out range is $73,000 to $83,000 for 2023.

4. How do the withdrawal rules between traditional and Roth IRAs differ? What about for early withdrawals?

Before making a Roth IRA withdrawal, keep in mind the following guidelines, to avoid a potential 10% early withdrawal penalty. Withdrawals must be taken after age 59½ and withdrawals must be taken after a five-year holding period. It is important to note that withdrawals of contributions, excluding gains, to Roth IRA are tax-free.

Generally, early withdrawal from a traditional IRA prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty.

5. Which is better, a traditional or a Roth IRA?

These are both powerful tools individually but are best used together.

To reduce lifetime income taxes on retirement account withdrawals, it is important to recognize taxes on retirement account balances in the tax years when we expect to be in the lowest income tax brackets, which is all based on our income. Essentially, in your higher income earning years, you should use a Traditional retirement account to defer the taxes, then recognize those taxes in the years where your income is lower (think job transition year, layoffs, going back to school, or retirement). 

Money can even be “converted” from the Traditional account to the Roth account in these years of reduced income, allowing the funds to grow tax-free following the conversion until the individual ultimately withdraws the funds tax-free in retirement.