Answers to Commonly Asked Questions About Roth and Traditional IRAs

By: Diana Spatoulas, KOS Senior Accountant

dspatoulas@koscpa.com

Individual Retirement Accounts, or IRAs, play an important role in retirement planning. Part of the planning process includes determining whether a Roth IRA or Traditional IRA is best for you. Presented below is a list of commonly asked questions regarding IRAs, the purpose of which is to provide a basic and general understanding of these two retirement accounts. Please keep in mind that the options available need to fit your circumstances and not necessarily those of your peers. It is always a good idea to contact your tax advisor or financial planner for retirement planning guidance that is unique to you.

What is the Main Difference Between a Roth IRA and a Traditional IRA?
Contributions to a Roth IRA are made with after-tax dollars and can be made at any age as long as you have earned income. Earnings grow tax-free and can be withdrawn tax free after the account has been open for a minimum of five years and you are age 59-½ or older. The benefit of a Roth IRA is that your withdrawals in retirement are not taxed.

With a Traditional IRA, earnings grow tax-deferred. In general, you postpone paying income taxes on your contributions until withdrawals are made, which are required to begin at age 70-½. The benefit of a Traditional IRA is that your contributions can be tax deductible. However, contributions to a Traditional IRA can be made only before the year you reach age 70-½.

What are the Contribution Limits?
If you are under age 50, you can contribute up to $5,500 to either a Roth IRA or Traditional IRA.

If you are age 50 or older as of December 31st, you can contribute up to $6,500.
You are able to contribute to your IRA through the April income tax filing date of each year. For the 2016 tax year, you have until April 18, 2017 to maximize your IRA contribution.

Does Income Level Affect the Contribution Amount?
Traditional IRA
There are no Traditional IRA contribution restrictions based upon income.

Roth IRA
The Roth IRA contribution limit could be reduced or eliminated (phased-out) based on your filing status and modified adjusted gross income (MAGI). The phase-out ranges are listed below.

FILING STATUS 2016 MAGI RANGE 2017 MAGI RANGE
Single

Head of Household

Married, filing separately and did not live together at any time during the year

 

$117,000–$132,000

 

$118,000–$133,000

Married, filing jointly $184,000–$194,000 $186,000–$196,000
Married, filing separately and lived together at any time during the year $0–$10,000 $0–$10,000

Are IRA Contributions Deductible?
Roth IRA
Contributions to Roth IRAs are not deductible. Ever.

Traditional IRA
Some or all Traditional IRA contributions may be deductible. If neither you, nor your spouse if you are married, are covered by an employer retirement plan, your Traditional IRA contributions are fully tax-deductible up to the contribution limit. If you are covered by a retirement plan at work, the deductible amount could be phased out if your MAGI exceeds certain levels. The phase-out ranges are listed below.

FILING STATUS 2016 MAGI RANGE 2017 MAGI RANGE DEDUCTION ALLOWANCE
Single

Head of Household

Married, filing separately and did not live together at any time during the year

$0-$61,000 $0-$62,000 Full deduction up to amount of contribution limit
$61,001-$70,999 $62,001-$71,999 Partial deduction
$71,000 or more $72,000 or more No deduction
 

Married, filing jointly

$0- $98,000 $0- $99,000 Full deduction up to amount of contribution limit
$98,001-$117,999 $99,001-$118,999 Partial deduction
$118,000 or more $118,000 or more No deduction
Married, filing separately and lived together at any time during the year $0–$9,999 $0–$9,999 Partial deduction
$10,000 or more $10,000 or more No deduction

 

If you are not covered by an employer retirement plan, but you spouse is, the deductible amount could be phased out if your MAGI exceeds certain levels. The phase-out ranges are listed on the next page.

FILING STATUS 2016 MAGI RANGE 2017 MAGI RANGE DEDUCTION ALLOWANCE
 

Married, filing jointly

$0-$184,000 $0-$186,000 Full deduction up to amount of contribution limit
$184,001-$193,999 $186,001-$195,999 Partial deduction
$194,000 or more $196,000 or more No deduction
Married, filing separately and lived together at any time during the year* $0-$9,999 $0-$9,999 Partial deduction
$10,000 or more $10,000 or more No deduction

What are the Rules Regarding Withdrawals?
Traditional IRA
Withdrawals from Traditional IRAs are taxable at ordinary income tax rates to you and your beneficiaries. It does not matter how the income was generated within the IRA account. The tax attributes that provide for lower rates on dividends, capital gains or other forms of income do not attach to funds within an IRA. Think of it as “What happens in an IRA stays in an IRA.” Only the money that leaves the Traditional IRA is taxable, and at ordinary income tax rates.

Traditional IRAs mandate Required Minimum Distributions (RMDs) begin at age 70-½. If you withdraw contributions from a Traditional IRA prior to age 59-½, you are subject to a 10 percent penalty in addition to income taxes unless you meet one of the nine penalty-free exceptions listed below.

Roth IRA
Contributions made to a Roth IRA can be withdrawn at any time without penalty. If you maintain the Roth account until age 59-½, and the Roth account has been open for a minimum of five years, withdrawals of earnings will be tax-free to you. The RMD rules are only applicable to beneficiaries, not to the original account owners.

Penalty-Free Withdrawals
Taking money out of an IRA is called a distribution. In some instances, the IRS may consider the following as “qualified distributions”, meaning penalty-free withdrawals, from either a Traditional or Roth IRA account:
– Qualified first-time home purchases (up to $10,000 lifetime limit);
– Qualified higher education expense distributions for account owner, spouse, children or grandchildren;
– Distributions for unreimbursed medical expenses that are more than a certain percentage of adjusted gross income;
– Distributions for certain health insurance premiums while unemployed;
– Distributions on account of total and permanent disability;
– Distributions to a beneficiary or estate on account of the IRA owner’s death, as long as the funds are not rolled over into another IRA or other retirement plan;
– Qualified military reservist distribution while serving on active duty for at least 180 days;
– Distributions on account of an IRS levy of the account the funds are drawn from;
– Distributions made as part of a series of substantially equal periodic payments for your life (or life expectancy), or the joint lives (or joint life expectancies) of you and your designated beneficiary.

No matter the level of complexity that an IRA may impose, saving money for your future is the best decision you can make and adequate retirement planning can provide peace of mind. Contact a KOS advisor today to help you determine which IRA option is best for you and with your overall retirement strategy. Source – https://www.irs.gov/retirement-plans/Traditional-and-roth-iras