Roth Vs. Traditional Vs. Rollover IRA

Different types of IRAs have different tax characteristics and IRS requirements.
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Roth IRAs, traditional IRAs and rollover IRAs are three of the most common types of individual retirement accounts. All provide tax benefits, but the differences between the accounts lie in the details. The main differences between the three types of accounts are in the deductibility of contributions, the amount you can contribute and the taxation of distributions.


As of 2012, you can contribute up to $5,000 to your Roth or traditional IRAs, or any combination thereof. If you are over age 50, you can contribute an additional $1,000 as a "catch-up" contribution. Your earned compensation must equal or exceed the amount of your contribution to qualify. The IRS allows you to roll over any amount to a rollover IRA, since a rollover is effectively a transfer rather than a contribution of new money. However, you can only rollover pretax assets, such as those in a traditional IRA or a 401(k). Rollovers are not permitted from a Roth IRA to a rollover IRA.

Deduction and Contribution Limits

If neither you nor your spouse is covered by a retirement plan at work, you can deduct your full contribution to a traditional IRA. However, if either of you were covered by such a plan, your modified adjusted gross income may limit the deductibility but not the amount of the contribution. For example, as of 2012 you receive no deduction if you file taxes jointly and have a modified AGI of over $110,000. For Roth IRAs, you never receive a tax deduction for contributions, however, your AGI will determine whether you can contribute to your Roth and, if so, whether you can contribute the full or a partial amount. Rollover contributions also receive no tax deduction, as you already received a deduction when you contributed to the original account.


While your money is in your IRA, you don't have to pay tax on any of your earnings. This is true for all types of IRAs and is one of the main advantages of owning an IRA. Distributions from traditional and rollover IRAs are typically fully taxable, since the money in the account has never been taxed. However, Roth IRAs enjoy tax-free withdrawals, as long as the money has been in the account for at least five years.

Early Distribution

For traditional and rollover IRAs, withdrawals before age 59 1/2 are taxed as regular income and except for specific early withdrawals allowed by the IRS, result in a 10 percent early distribution penalty. For Roth IRAs, the withdrawal of earnings before age 59 1/2 results in the same ordinary taxation and early distribution penalty on previously untaxed earnings. However, Roth IRAs do permit the withdrawal of contributions at any time, even before age 59 1/2, without any tax or penalty.

Mandatory Distributions

The IRS requires minimum annual distributions from traditional and rollover IRAs once you reach age 70 1/2. Your first withdrawal must occur no later than April 1 after you reach 70 1/2, and annual distributions must follow no later than December 31 of each successive year. Roth IRAs carry no such mandatory distribution requirement.

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