Traditional IRA VS. ROTH IRA

Both Roth and traditional IRAs offer advantages.Which one you choose depends on the type of account you have now (pre-tax or after-tax) and other factors, such as when you want to pay taxes.

Typically most employer sponsored retirement plans are tax deferred, meaning you did not pay income taxes on the money you put in the plans. Therefore, it would usually make the most sense for rolling over your 401k to a traditional IRA because you pay taxes when you withdraw the money in retirement.

With a Roth IRA, it's the exact opposite. You pay the taxes on the front end, but there are no taxes on the back end. Remember, in both traditional and Roth IRAs, your money will continue grow tax free. However, some employers now allow for Roth 401k. If you don’t know what type of plan you have, please feel free to contact us and we will help you figure it out.

Roth IRAs are more flexible if you need to make an early withdrawal before 59 1/2. In addition, with a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older. However, with a traditional IRA, by contrast, you must start withdrawing the money by the time you reach age 70½.

Choosing the type of IRA

Traditional IRA Roth IRA

Can I transfer my employer sponsored Qualified plans including profit-sharing, 401k, money purchase and defined benefit plans?

Yes. Yes. However, if 401k, 403(b), and 457(b) beginning as early as January 1, 2015, only one rollover in any 12-month period.

Which type of IRA can I use for my rollover?

You can rollover into a traditional IRA (tax-free) if you were previously investing in a "traditional" 401k or 403(b) where you worked. You can't rollover into a traditional IRA from a Roth 401k or Roth 403(b). You must rollover into a Roth IRA (tax-free) if you were previously investing in a Roth 401k or Roth 403(b) where you worked. You can also rollover into a Roth IRA if you were previously investing in a "traditional" 401k or 403(b), but this will be considered a Roth conversion and you'll have to pay taxes.

Tax consequences

Traditional IRA Roth IRA

Will I pay taxes if I rollover my employer sponsored retirement plan?

When you rollover a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan. When you rollover a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan.

If I rollover my employer sponsored plan with the money continue to grow tax deferred?

By rolling over, you’re saving for your future and your money continues to grow tax-deferred. By rolling over, you’re saving for your future and your money continues to grow tax-deferred.

What if I don't rollover the distribution from my employer sponsored plan?

If you don’t rollover your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions. If you don’t rollover your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions.

Withdrawals

Traditional IRA Roth IRA

Will I pay taxes on withdrawals?

You'll pay ordinary income tax on withdrawals of all earnings and on any contributions you originally deducted on your taxes. There is a 10% federal penalty on withdrawls taken prior to your reaching age 59½. You'll never pay taxes or penalities on withdrawals of your contributions. And you won't pay taxes on withdrawals of your earnings as long as you take them after you've reached age 59½ and owned the account for at least 5 years.

Are there required distributions?

Yes, starting the year you reach age 70½. No.

Contributions

Traditional IRA Roth IRA

Can I contribute more to my new IRA?

Yes, as long as you're under age 70½. Also, the amount of your contribution can't exceed the amount of income you earned that year (or that your spouse earned, if you're not working anymore). In addition, you're subject to annual traditional IRA limits ($5,500 for 2013, $6,500 if you're age 50 or older). Yes, but the amount of your contribution can't exceed the amount of income you earned that year (or that your spouse earned, if you're not working anymore). You're also subject to annual Roth IRA limits ($5,500 for 2013, $6,500 if you're age 50 or older). And those limits are reduced—and gradually phase out—as your modified adjusted gross income increases. (There are no age limits on Roth IRA contributions.)

Can I deduct future contributions on my taxes?

Yes, under certain conditions, including whether or not you or your spouse is already covered by a retirement plan at your work. If so, deductions will be depend on your income. No. All contributions are after-tax.

Are there required distributions?

Yes, starting the year you reach age 70½. No.