Now this is a question a calculator won’t be able to answer for you. Before speaking of the differences, let’s talk about the similarities. The reason people often get confused between these two is because they are fairly similar in many ways.
First of all both do not require employer sponsorship. Both have almost similar contribution limits if you are aged 50 or older. Both traditional and Roth finds can be invested in various ways such as stocks, bonds, certificates of deposits, etc.
Regardless of these similarities, there are some differences that play a very important role when making a choice using a calculator for Roth vs. Ira. The following are the main differences
Income Limits – If you are aged below 70 and are still earning, you are eligible for traditional IRA. For Roth, however, there is certain income limit. If you are a single tax filer and your modified adjusted gross income is less than 125,000, you are eligible to contribute to a Roth IRA. For couples filing jointly, the adjusted gross income is less than $183,000. These limits however are subject to change almost every year.
Tax Incentives and Deductions – This is one of the major factors that can affect the outcome of your decision. Roth earnings and withdrawals are tax-free while in case of IRA, your contributions are tax-deductible for the first year but withdrawals are taxed as income. In short, traditional IRAs save you from paying taxes when you contribute and Roth IRAs save you from taxes when you withdraw. Use a calculator to help you assess the difference this can create according to the amount of contribution you wish to make.
Withdrawal – for traditional IRA, the withdrawal age is 59.5 after which withdrawals are tax-free. However, if withdrawn earlier, a penalty is charged and the amount is not considered tax-free. In case of death, beneficiaries are required to pay the taxes. In case of Roth, contributions can be withdrawn anytime without being penalized. However, withdrawals are tax-free only after you’ve reached the age i.e. 59.5.
Minimum Required Distribution – in case of traditional IRA, minimum required distribution starts at the age of 70. Roth, however, is not subject to minimum required distributions as long as you are alive. After that, beneficiaries get the added advantage of stretching the distributions over many years.
While we have only presented a basic overview of Roth and Traditional IRA for awareness sake, there some complex calculation required. A calculator designed specifically for this purpose can help you make a decision that proves beneficial in the long term.