Do Traditional and Roth IRA Rules Differ?


Although there are many similarities between a traditional and a Roth IRA, there are a number of differences. The primary difference is that Roth IRA contributions are not tax deductible, while traditional IRA contributions usually are at least partially tax deductible. Additionally, the Roth IRA has strict income limitations that restrict who is eligible to contribute.

As of 2014, both traditional and Roth IRAs have annual contribution limits of $5,500 per person. The limit is raised to $6,500 if the account holder is 50 or older. A traditional IRA requires that the funds begin distribution once the account holder reaches age 70.5. The Roth IRA has no minimum funds distribution requirement.

Roth IRA contributions are not tax deductible. There is no tax due at withdrawal on either contributions or earnings, provided the account has been active for at least five years, and the account holder is using the funds for a qualified first home purchase or is age 59.5 or older. Only individuals with a modified adjusted gross income of $112,000 or less are eligible to maximize the annual contribution limit of $5,500 to a Roth IRA. Individuals with a MAGI of up to $127,000 are eligible for a partial contribution to a Roth IRA, with the rest of the funds placed in a traditional IRA.

Traditional IRA contributions can be tax deductible or partially tax deductible based on MAGI. In 2014, an individual with a MAGI of up to $70,000 is eligible for at least partial deductibility. At the time of withdrawal, any pre-tax contributions and all earnings are taxed. Although taxes are assessed at the time of withdrawal, there are no additional penalties, provided the funds are used for a qualified purpose, or the account holder is age 59.5 or older. There are no income limits on who can contribute to a traditional IRA.