Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
A traditional IRA is considered a tax-deferred plan, meaning that eventually you’ll have to pay taxes on the money, just not now. So any contributions you make to a traditional IRA — up to $5,500 for anyone under 50 — will not be considered taxable income. So if you make $100,000 and make the maximum $5,500 contribution, the IRS will tax you as though you only made $94,500.
A Roth IRA is for the investor who doesn’t mind delayed gratification. Contributing to a Roth won’t help you an iota with your current year tax bill, but when you withdraw after you turn 59 ½, you’ll pay absolutely no income taxes on that money, so long as the account is more than 5 years old.
But note that there are also some major differences between the contributions the IRS will allow to these accounts. Anyone’s free to contribute $5,500 to a traditional IRA, and those over 50 can contribute as much as $6,500 to either a traditional or Roth IRA. But Roths aren’t available for big earners. If you’re single and your income is lower than $118,000, you’re eligible to contribute the full $5,500 to your Roth. If you make any more than that, you’ll be subject to a sliding scale that determines your maximum contribution (consult the IRS website for the particulars.) If you make more than $133,000, sorry, no Roth for you. (Those married and filing jointly will need to make less than $186,000 to make the full contribution, and will become ineligible once they make more than $196,000.) There’s one other major difference between the two. Once you turn 70 1/2, you’ll be obligated to take annual minimum distributions from your Traditional IRA. Roths have no such rule so you’ll be able to keep growing that tax-free investment well into your Yoda years.
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