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If you think traditional and Roth individual retirement accounts are the same, think again.
There are some big differences between these popular retirement savings plans.
And what you don't understand about the particular rules that apply can cost you, according to IRA expert Ed Slott, founder of Ed Slott & Co.
With traditional IRAs, you get a tax deduction upfront. The taxes you pay on that money are delayed until you withdraw it in retirement.
Roth IRAs, on the other hand, are funded with post-tax money.
"With a traditional IRA, you're at the mercy or uncertainty of what future higher tax rates might do to your retirement savings," Slott said. "With a Roth IRA, you don't have to worry about future rates, because your tax rate in retirement will be zero."
There are five key differences between these two retirement accounts that savers need to understand.
Contributions to traditional IRAs do not have income limits for savers who contribute to these kinds of accounts (though high earners may not get the upfront tax break).
Roth IRA contributions, however, do have income limits. For 2018, the income phase-out range is $120,000 to $135,000 for singles and $189,000 to $199,000 for married couples who file jointly.
The rules for traditional IRAs prevent you from making contributions once you turn 70½.
But the same doesn't apply to Roth IRAs. You can continue to contribute to those accounts at any age, according to Slott, if you have the earned income wages or self-employment income to do so.
Your participation in a company retirement plan generally doesn't affect either traditional or Roth IRA accounts.
It is important to note, however, that with a traditional IRA, you may not be eligible for the deduction depending on your income.
The rules around required minimum distributions mark the biggest difference between traditional and Roth IRAs, according to Slott.
With traditional IRAs, you are forced to take distributions starting at age 70½. Roth IRAs aren't subject to required minimum distribution rules.
If you withdraw from a traditional IRA before retirement, you will pay tax on that money. Plus, if you are under 59½, you generally will be subject to an additional penalty.
You can take money out from Roth IRAs, on the other hand, for any reason, penalty free. The key is that those withdrawals have to be the money you contributed, not funds from IRA conversions or earnings on your investments.
In order to withdraw the earnings on your contributions without paying taxes or other penalties, you have to wait at least five years since you first invested the money. You must also be age 59½ or older.
"That's a big deal for lots of younger people who are worried, 'What if I need to get to my money?'" Slott said.
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