Roth IRA? Traditional IRA? What are they? Do I need one?
Are you concerned about planning for retirement? You’re not alone! A recent CNBC poll revealed that 53% of Americans surveyed “feel they are behind on retirement planning and savings.” If you feel the same, you may want to consider investing in an IRA.
What does IRA stand for?
IRA stands for Individual Retirement Arrangement, but many people refer to it as an Individual Retirement Account. An IRA is an investment account that can hold a variety of assets, including stocks, bonds, mutual funds, certificates of deposit, money market accounts, and more.
The traditional IRA was established by the Employee Retirement Income Security Act of 1974, while the Roth IRA was created as part of the Taxpayer Relief Act of 1997 and named after its legislative sponsor, Senator William Roth.
Which type of IRA is right for me?
There are a number of significant differences between a Roth IRA and a traditional IRA. Coast Central Credit Union’s webpage IRA Accounts provides a wealth of information about both kinds.
Roth IRA
- Your contributions are not tax-deductible.
- Contributions can be withdrawn at any time without penalty or taxes.
- Earnings can be withdrawn tax-free after age 59½ if you’ve had the account for at least five years.
- You don’t have to make any minimum withdrawals during your lifetime.
Traditional IRA
- Your contributions may be all or partly tax-deductible. (This depends on your filing status, your modified adjusted gross income (MAGI), and whether you or your spouse have work retirement plans.)
- Your withdrawals during retirement will be taxed as regular income.
- If you withdraw money before age 59½, you will probably have to pay a penalty.
- You must make minimum withdrawals, called Required Minimum Distributions (RMDs), starting at age 72 or 73 (depending on birth year).
How much money can I contribute to an IRA?
Each year, the Internal Revenue Service (IRS) sets the IRA contribution limit. In 2024, the limit is $7,000 if you’re younger than 50, and $8,000 if you’re 50 or older. Contributions for the tax year can be made until the following year’s Tax Day, so this year’s deadline is April 15, 2025. If you have more than one IRA, the limit applies to your total contribution to all of them.
Be sure to check out Coast Central’s helpful calculator: Spend It or Invest in an IRA. When you input information, such as investment amount, current age, retirement age, and other factors, you will learn the potential value of your investment, comparing a traditional IRA with a Roth IRA.
In addition, you can easily access Coast Central’s rates for IRAs. (Click the Retirement tab.)
What are the income limits for a traditional IRA?
There are no income limits.
What are the income limits for a Roth IRA?
Each year, the IRS sets the income limits, based on your modified adjusted gross income (MAGI). As of 2024, if your tax status is single, your MAGI must be less than $146,000 to contribute the full amount allowed, and less than $161,000 to make any contributions. For those whose tax status is married filing jointly, the MAGI must be less than $230,000 to contribute the full amount allowed, and less than $240,000 to make any contributions.
Is a 401(k) an IRA?
While both are for retirement savings, they are different kinds of plans with different rules.
A 401(k) is a retirement plan that employers set up for their employees to contribute to. Often, the employer offers a “match” to the employee’s contributions—such as the same percentage that the employee contributes—within specified limits.
Many 401(k)s are traditional, so the money you contribute is tax-deferred, and your income taxes on the employer’s matching funds are also tax-deferred. However, some employers offer a Roth 401(k) plan, where you make contributions with money that has already been taxed. Recently, employers have been allowed to make matching contributions to this type of plan.
Coast Central provides a helpful calculator about both types: Traditional 401(k) or Roth 401(k)? When you input information, such as current age, retirement age, annual contribution, and other factors, you will learn the potential value of your investment, comparing a traditional 401(k) with a Roth 401(k).
What is a rollover IRA?
If you leave a job and do not wish to keep your employer-sponsored retirement account, such as a 401(k), you have several choices—one of which is a rollover IRA. With this option, you move the money from your 401(k) into an IRA (either Roth or traditional). This keeps you from being taxed on the money or paying an early withdrawal penalty. There is no maximum amount you can transfer into a rollover IRA, so this is a good option if you want to consolidate all your old 401(k) accounts in one place.
How do I open a Roth IRA or a traditional IRA?
You can get both kinds of IRAs from a variety of places, including a credit union, bank, brokerage firm, insurance company, mutual fund company, online broker, and a robo-advisor platform (automated investing service).
Contact the knowledgeable and friendly team at Coast Central’s Member Support Center to set up a Roth IRA or a traditional IRA. We believe that with an IRA and good planning, you can have a great retirement! The best times are yet to come!
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