IRAs | Roth or Traditional Individual Retirement Accounts

by | Retirement

Having an individual retirement account (IRA) can help you get started with retirement. Retirement planning is usually one of the furthest things on the minds of college students and new graduates. However, it’s a lot easier than many people think.

Individual retirement accounts allow you to easily set aside money for your retirement with some tax benefits.

What is the difference between a Roth IRA and a Traditional IRA?

Wikipedia defines Traditional and Roth individual retirement accounts:

  • Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William Roth.
  • Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

As you can see, Roth IRA withdrawals are tax free while traditional IRA withdrawals are taxed.

How much can you contribute your Roth IRA?

The IRS has specific income limits with contributing to Roth IRAs. Right now you can contribute $5,000/year to a Roth IRA if your modified AGI is :

  • $169,000 for married filing jointly or qualifying widow(er),
  • $116,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

How much can you contribute your traditional IRA?

Traditional IRAs have a different income limits with contributions. Right now you can contribute $5,000/year to a traditional IRA if your modified AGI is :

  • More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifyingwidow(er),
  • More than $53,000 but less than $63,000 for a single individual or head of household,
  • Less than $10,000 for a married individual filing a separate return.

Where can you open an IRA?

The good news is many banks, brokerages, and credit unions offer both traditional and Roth IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this.

The idea is to keep your fees as low as possible and get the best performance.

Some online options for opening an IRA:

  • E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
  • Vanguard (Some funds require $3,000 minimum)
  • T. Rowe Price
  • Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)
  • Sharebuilder (No minimum to open; no admin annual fee)
  • Zecco( No minimum to open; $30 annual fee)

The sooner you start the better. It’s generally accepted that the sooner you start the better compound interest will treat you.

More Information on Individual Retirement Accounts

Laura Martinez

Laura Martinez