An individual retirement account (also known as an IRA) allows you to save for retirement in a tax-advantaged way. You can use an IRA to supplement the retirement savings plan sponsored by your employer. Try to contribute at least enough in that plan to take full advantage of any matching contributions your employer will make to your account. Beyond that, consider using an IRA to build even more retirement savings while getting significant tax advantages.
You have two basic versions of an IRA to choose from: traditional and Roth. Below is a side-by-side comparison. For more help with deciding which type of IRA may be right for you, use the Roth vs. Traditional IRA tool on your EY Navigate™ website or mobile app.
|
Traditional IRA |
Roth IRA |
Eligibility |
You can contribute at any age if you (or your spouse filing jointly with you) have earned income. |
You can contribute at any age if you (or your spouse filing jointly with you) have earned income and your modified adjusted gross income1 doesn't exceed a certain level based on your filing status. |
Contributions limit |
In 2021, each individual, including each spouse in a married couple filing jointly, can contribute up to $6,000 total ($7,000 if 50 or older) to all their traditional and Roth IRAs combined. |
See "Traditional IRA." |
Tax advantages |
You can generally deduct your contributions, depending on your filing status and income level and whether you and your spouse participate in a retirement savings plan at work. Taxes are deferred on any savings growth.2 |
You can't deduct your contributions, but qualified distributions from the account are tax-free and penalty-free. |
Withdrawals |
You can withdraw money any time, but any amount distributed before you reach age 59½ will generally be subject to a 10% federal penalty in addition to taxes. Once you turn 72, you're required to withdraw a certain amount of money from your account each year; otherwise, you'll incur an IRS penalty. |
You can withdraw money any time. No taxes or penalties are due when you withdraw your own contributions. Once your account has been in place at least five years, you can withdraw earnings free of federal taxes and penalties, as long as you're at least age 59½.3 There's no requirement to start taking withdrawals by any given age. So, a Roth may enable you to leave more assets to your heirs. |
Bottom line |
A traditional IRA might be your better option if you think you might be in a lower tax bracket after you retire. |
A Roth IRA might be your better choice if you think you might be in a higher tax bracket after you retire or if leaving assets to your heirs is a priority. |
1Your modified adjusted gross income (also known as MAGI) is your total income plus certain deductions added back in.
2Certain high-income taxpayers are subject to limits on the deductibility of contributions. If you're subject to such limits, you can contribute to a nondeductible IRA, which will still allow you to enjoy tax-deferred growth of your savings.
3There are other scenarios in which you can withdraw earnings free of federal taxes and penalties, as long as your account has been in place at least five years.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice.