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Traditional and Roth IRAs are both designed to help you save for retirement. So which one makes sense for you? Well, that depends on how much you're saving, your tax bracket and several other factors. Your financial advisor can help you decide what type may work best for your situation – or if both may even make sense.
The key difference boils down to everyone's favorite topic: taxes. As with nearly everything, there are trade-offs. With Roth accounts, you don't receive any tax deductions today but can take withdrawals in retirement without paying taxes.1 With traditional IRAs, you may be eligible to take a tax deduction today and can delay paying taxes until later, when you begin taking withdrawals.
|Traditional IRA||Roth IRA|
|Can I deduct my contribution from my taxes?||
Yes, as long as certain requirements are met2
|Am I eligible to contribute?||You or your spouse (if married) must have earned income.||You or your spouse must have earned income AND meet Modified Adjusted Gross Income (MAGI) requirements.|
|How much can I contribute?||Lesser of 100% of earned income or limit below:
Same as Traditional IRA.
Based on the characteristics of Roth plans, younger investors, individuals currently in lower tax brackets and investors with the majority of their investments in traditional IRA accounts/retirement plans may all consider using a Roth.
One important thing to remember: If you are not currently eligible to contribute to a Roth IRA, you might consider converting your Traditional IRA to a Roth IRA or contributing to a Roth 401(k) at work (if available) to provide for tax-free income in the future.
1Earnings distributions from a Roth IRA may be subject to taxes and a 10% penalty if the account is less than five years old and the owner is under age 59½.
2Your Traditional IRA contribution may be deductible depending upon your participation in an employer-sponsored retirement plan, and your tax-filing status. If you and your spouse (if married) are not covered by a plan, you can deduct the contribution regardless of income.