Weight Your IRA Options

Choosing the type of IRA you want can be a daunting task. While both have tax advantages of one type or another, traditional and Roth IRAs are generally polar opposites. Here’s a look at both types of IRAs and what they can do for your retirement savings efforts in 2018.

Eligibility

Anyone can contribute to a traditional IRA, but contributions are not tax-deferred if you exceed income limits. For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000 in 2018.

Married couples filing jointly have a phase-out range from $101,000 to $121,000 when the spouse making the traditional IRA contribution is covered by a workplace retirement plan. If you’re not covered by a workplace retirement plan and are married to someone who is, the phase-out is between $189,000 and $199,000.

High-income taxpayers are not eligible to contribute to a Roth IRA. Eligibility to make contributions in 2018 is phased out if annual income is from $120,000 to $135,000 for singles and heads of household. The income phase-out range for couples filing jointly is $189,000 to $199,000.

Contributions

If you contribute to a 401(k) plan or a traditional IRA, you are probably familiar with tax-deferred contributions. They are deducted from your gross pay before taxes are calculated, so your taxable income is reduced. Contributions to a Roth IRA are not deductible.

Tax-Deferral

Here’s one area where Roth and traditional IRAs are the same. Both IRAs feature potential earnings growth that are tax-deferred.

Distributions

Qualified Roth IRA distributions are tax-free after age 59 1/2 if you have owned the IRA at least five years. Distributions from traditional IRAs are subject to ordinary income taxes. Also be aware that distributions taken before age 59 1/2 are subject to an additional 10% tax penalty, with few exceptions.

Contribution Limits

The annual contribution limit for both types of IRAs is $5,500 in 2018, plus another $1,000 if you’re at least age 50. The limit is for either IRA, or for combined contributions to both.