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Glossary

Traditional or Roth, which one is right for you? Both can help you save for retirement but offer different advantages. Selecting an IRA is a big decision with potentially big financial consequences. So it's important to know how the two types of IRAs differ to understand which one works best for you.

Attributes of a Traditional IRA

Annual tax-deductible contributions¹
Earnings grow tax-deferred²
Taxes paid on account earnings upon withdrawal
No income cap and open to everyone under age 70½ with earned income. Annual contribution may not exceed total earned income.
Withdrawal of funds before 59½ is subject to a 10% penalty
Mandatory distributions by 70½

Attributes of a Roth IRA

Account funded with after-tax income
Tax-free growth and tax-free withdrawals³
Principal can be withdrawn at any time without penalty
Earnings are federally tax-free after a five-year aging requirement as long as one of several conditions is met, including age 59½, disability, or qualified first-time home purchase.
Generally only open to single filers with income up to $125,000 or married couples with a combined income of up to $183,000 annually (in 2012)
No mandatory distributions in your lifetime

Tax-deferred vs. Tax-free

The main difference between a Traditional and Roth IRA is the way they are taxed. With a Traditional IRA, there is an up-front tax benefit since all or part of your annual contributions may be tax-deductible subject to income requirements. Your account grows tax-deferred, but you’ll pay taxes later on. A Roth IRA grows tax-free because you’re taxed on your contributions up front. You’ll also have the benefit of tax-free withdrawals with no required distributions.

Both IRA types offer tax benefits. What works best for you depends on your income level and financial situation. Consult your financial advisor about which one may be right for you.

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¹ For a Traditional IRA, full deductibility of a contribution for 2012 is available to active participants whose 2012 Modified Adjusted Gross Income (MAGI) is $92,000 or less (joint) and $58,000 or less (single); partial deductibility for MAGI up to $112,000 (joint) and $68,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $173,000 for 2012; partial deductibility for MAGI up to $183,000.

² For Traditional IRAs, penalty-free withdrawals include but are not limited to: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.

³ A distribution from a Roth IRA is federally tax-free and penalty-free provided that a five-year aging requirement has been satisfied and one of several conditions is met, including age 59½, disability, or qualified first-time home purchase.

Please visit the IRS site and consult IRS Pub 590 for more detailed information.