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If you’re self-employed, own a business, or otherwise don’t have an employer-sponsored retirement savings plan available to you, an individual retirement account (IRA) is a good option for you to consider. However, you need to determine if a traditional IRA or a Roth IRA is the right choice for your situation before you open an account. Neither is necessarily better than the other since both have advantages and disadvantages.


If you thought about opening an IRA in 2017 but didn’t get around to it, you have until April 15, 2018 to start and contribute to one. That is also the deadline to make contributions that count for 2017 on an existing account.


Similarities Between the Two Account Types


The maximum amount you can contribute to either account is the same with a limit of $5,500 for tax year 2017. The year that you turn 50, you can contribute an additional $1,000 in catch-up contributions for a maximum investment of $6,500 annually.


Another similarity between a traditional IRA and a Roth IRA is that both qualify you for the saver’s tax credit on your income tax return. The credit reduces your amount of taxable income, but you cannot receive a refund because of it. Your eligibility depends on your income and filing status. The maximum for your 2017 tax return is $31,000 for a single tax filer or married persons filing individually, $46,500 for head of household, and $62,000 for married couples filing jointly. This amount increases slightly in each category for the 2018 tax return.


Differences to Consider


The traditional IRA and Roth IRA have more differences than similarities. For starters, contributions to a Roth IRA are never deductible. With a traditional IRA, you can potentially deduct some or all contributions depending on your filing status, active participant status, and income. Here are some other important differences:

Age limit:

While the Roth IRA doesn’t impose an age limit for contributions, you can’t contribute to a traditional IRA past age 70.5.

Income caps affecting contributions:

You may run into an income cap with the Roth account while this doesn’t exist with the traditional account.

Tax implications of earnings on investments:

With the Roth IRA, you can grow your earnings on a tax-deferred basis. All qualified distributions are tax-free, which includes distribution of your earnings. Your earnings also grow tax-deferred with a traditional IRA, but any earnings attach to your taxable income the year you take a distribution.

Rules for distribution:

You can take a distribution at any time for both accounts. Qualified distributions are tax-free and penalty-free with the Roth account. With the traditional account, you may pay a penalty if withdrawn before age 59.5 and the IRS considers distributions as ordinary income.

Minimum distribution:

You’re not subject to minimum distribution rules with a Roth IRA, although they do affect your beneficiaries. With the traditional IRA, you must start withdrawing minimum amounts the year you turn 70.5.

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