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The most common types of IRAs are Traditional IRAs and Roth IRAs. The main difference between the two of them is when income tax is paid.

A traditional IRA permits investment of pre-tax dollars that are invested tax free. When money is withdrawn or distributed, it is subject to ordinary income tax.

With a Roth IRA, money is invested after tax and is invested tax free. With a ROTH IRA, distributions and withdrawals are tax free.

There are also SEP and SIMPLE IRAs for use by small businesses and a Coverdell ESA (formerly known as an Education IRA) for to help fund education for young people. These IRAs are basically subject to the same general IRA rules as traditional IRAs and Roth IRAs.

The following information applies to all IRAs. See the other sections of this article for (1) a chart comparing the various types of IRA and (2) information specific to each type of IRA.

When Can I Make Contributions?

Contributions to an IRA can be made at any time during the year or by the due date for filing your return for that year. When you determine the due date for filing your return for a year, keep in mind that extensions are not included for purposes of IRAs.   For most, this means contributions for 2015 can be made anytime between January 1, 2015 and April 18, 2016.

NOTE:  If you contribute to your IRA between Jan 1, 2015 and the filing deadline (April 18 for 2016), you should tell the sponsor in writing which year (2015 or 2016) the contribution is for.  If you do not say anything, the sponsor may make an assumption that is not what you want.

What Types Of Assets Can I Contribute?

Contributions to an IRA must be in the form of money (cash, check or money order). 

If permitted by the trustee of the Plan, you can also transfer securities into an IRA.  Real or personal property, however, cannot be contributed.

What If I Contribute More Than Permitted?

If you contribute more than is allowed to an IRA, the excess amount will be subject to an excise tax of 6%. You can correct the excess contribution, and avoid the excise tax, by making withdrawals that bring the contribution down to the maximum permitted amount. The withdrawals must occur on or before the date you file your return.

If you don't correct the situation in time, you will have to pay the 6% extra tax each year until you take a distribution or reduce your future contributions to offset the excess deposit.

For additional information, see: 

                                                                                                       Edited by: Peg Downey, CFP, NAPFA
                                                                                                                          Money Plans
                                                                                                                          Silver Spring, MD
                                                                                                                          January 2014

Comparison of Roth vs. Traditional IRA: A Chart



Traditional IRA

Roth IRA

Current Tax Savings

In 2016, shelters up to the lesser of earned income or $5,500 a year ($6,500 if age 50 and above) from current income taxes ($11,000 and $13,000 if married and filing a joint return). The amount is maximum for combined Traditional and Roth IRAs.

There are "phase out" rules - the maximum changes as income increases. For current information, see the Smart Money IRA primer offsite link.


Tax-Deferred Growth

No tax paid on income or growth of assets until distribution.

No tax paid on income or growth of assets until distribution. Even at distribution, usually not taxed.

Withdrawals after age 59 l/2

Entire distribution is taxed as ordinary income.

Entire withdrawal is income tax free, as long as the account is at least five years old.

Withdrawals for Disability

Entire distribution is taxed as ordinary income.

Entire withdrawal is income tax free, as long as the account is at least five years old.

Mandatory Withdrawals

Withdrawals must begin no later than April 1st of the year after you reach age 70 1/2.

NONE. You do not have to take money out ever, and can leave the entire account to your beneficiary.

The Traditional IRA

A traditional IRA is also known as an "original," "ordinary," or "regular" IRA. It is any IRA that is not a Roth IRA, SEP or SIMPLE, IRA, or a Coverdell (education) IRA (each of which are discussed below.)

In a traditional IRA:

  • Your contributions are usually tax-deductible.
  • Earnings and growth on the assets in the account are not taxed while in the IRA.
  • Distributions, including the earnings and growth on the assets in the account, are taxed when they are distributed.

The idea behind the IRA is that most people have less income during retirement than during their working years, so it's expected that you will be in a lower tax-bracket when distributions are made. Therefore, you will pay less taxes on the money than you would if you pay the taxes as the money is earned.

As an example, if you put $2,000 into an IRA bank savings account this year, with a traditional IRA account you can subtract the $2,000 from your gross income before figuring your tax, provided that you are eligible to deduct contributions. You do not pay tax on the interest as it is earned. When you withdraw the money, you pay an income tax on both the money you put in originally and on any gains and interest.


The amount you can contribute to an IRA each year depends on several factors, including your filing status and amount of income. To learn about your situation, see IRS Publication 590-A. offsite link


Generally, you can deduct the full amount of your allowed contribution, unless you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made.

If you or your spouse were covered by an employer plan, your deduction may be reduced or eliminated, depending on your income and your filing status (whether you file individually or a joint tax return.)

If you have question about whether there was coverage by an employer retirement plan, check your W-2 form - the annual statement that you receive from your employer every year that lists your earnings and taxes withheld.  If you are covered by your employer's retirement plan, the "Pension Plan" box (in Box 15) should have a mark in it. 

If you are not certain if you were covered or not, ask the human resources department of your employer. If there is no separate department or person in charge, ask your supervisor.

Keep in mind that even if you cannot deduct the full amount you are allowed to contribute, you can make the balance as a nondeductible contribution, including, if otherwise allowed, a contribution to a Roth IRA.  While you cannot deduct the amount of the excess contribution, you can defer taxation on the income from the amount you contributed.


For more information on Traditional IRAs, see IRS Publication 590 at: offsite link offsite link

Roth IRA

A Roth IRA works differently than a traditional IRA.


In order to establish a Roth IRA, your taxable compensation and modified Adjusted Gross Income must both be less than the following:

  • Married filing jointly, or a qualified Widower -- $193,000
  • Married, filing separately and you lived with your spouse at any time during the year -- $10,000
  • Single, head of household, or married filing separately and you did not live with your spouse at any time during the year -- $131,000

There is no age limit with respect to being eligible to start a Roth IRA.


Contribution Limits  

There is a maximum that can be contributed to a Roth IRA each year. Limits are different depending on age. There are low limits on Roth contributions. The maximum is the lesser of:

  • People under age 50: limit is $5,500 a year; People age 50 and older: limit is $6,500 a year or
If your filing status is... And your modified AGI is... Then you can contribute...
married filing jointly orqualifying widow(er)

 < $186,000

 up to the limit 

 > $186,000 but < $196,000

 a reduced amount

 >  $196,000


married filing separately and you lived with your spouse at any time during the year

 < $10,000

 a reduced amount

 > $10,000


singlehead of household, ormarried filing separately and you did not live with your spouse at any time during the year

 < $118,000

 up to the limit (see above)

 > $118,000 but < $133,000

 a reduced amount

 > $133,000


Amount of your reduced Roth IRA contribution

If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

  1. Start with your modified AGI.
  2. Subtract from the amount in (1):
    1. $184,000 if filing a joint return or qualifying widow(er),
    2. $-0- if married filing a separate return, and you lived with your spouse at any time during the year, or
    3. $117,000 for all other individuals.
  3. Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year).
  4. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
  5. Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

See Publication 590-A offsite linkContributions to Individual Retirement Accounts (IRAs), for a worksheet to figure your reduced contribution.

NOTE: The above chart and information about numbers is from the IRS: offsite link


A Roth IRA differs from traditional IRAs in that contributions are not deductible when made.  

Profits accumulate in a Roth IRA tax free.

Contributions can be made to your Roth IRA regardless of your age.

You can leave amounts in your Roth IRA as long as you live. There are no distribution requirements with a Roth IRA.

Qualified distributions are tax free and penalty free if you satisfy the requirements.

  • As a general matter, to make a qualified distribution, you have to be at least age 59 l/2 and wait 5 years from the day you opened the Roth IRA to take a qualified distribution. 
  • When you convert a traditional IRA to a Roth IRA, you have to wait at least 5 years from the first day of the tax year in which you made the conversion to take a qualified distribution.

NOTE: Individuals with more than $100,000 in annual income (and couples with more than $176,000) are able to roll over their money from traditional IRAs into Roth Accounts. This allows a contribution greatly above the usual annual limits. The money rolled into the Roth IRA will be subject to ordinary income tax if it has not been taxed before.


Even if you do take money out before age 59 1/2, in many cases - such as if you pay excessive medical expenses or if you become disabled - you won't have to pay taxes on the earnings.

SIMPLE IRA and SEP IRA For Small Businesses

Both a Simple IRA (Savings Incentive Match Plans For Employees IRA) and a SEP IRA (Simplified Employee Pension IRA) are variations of IRA plans used by small employers to make contributions toward their employees' retirement and their own retirement.

Under a SEP-IRA, an employer can contribute to an employee's existing IRA.

Contributions are deductible. Self employed individuals have a different standard for contribution limits than employees of a firm that offers a SEP-IRA. The employer does not have to contribute (tax deductible) funds every year.

Penalties for early withdrawal are the same as with a traditional IRA.

For information about your plan, ask your employer for a copy of your Plan.

Coverdell ESA (formerly known as an Education IRA)

A Coverdell ESA (Education Savings Account) is a custodial account or a trust created for the purpose of paying the qualified education expenses of the designated beneficiary of the account. It allows you to save money on a tax deferred basis for education expenses for a child under 18 or a special needs beneficiary.

You can not deduct the money you contribute from your taxable income when you deposit it.

Your child will not have to pay taxes on the money's growth and earnings if he or she has qualified higher educational expenses in the year of withdrawal, up to the amount withdrawn.

The maximum contribution that can be made in 2015 to a child's account is $2,000 per year, provided that your modified adjusted gross income, as defined by the IRS, is less than $110,000 if you are single and $220,000 if you're married and filing a joint tax return. After income reaches the limits, the right to contribute to a child's account phases out very quickly.

Anyone can contribute to a child's educational IRA, but the combined contributions of all contributors still cannot be more than $2,000 per year. Unlike other IRAs, the deadline for making contributions is the end of the tax year (December 31 for most taxpayers), not the filing deadline.

The money contributed to a Coverdell does not count against the amount you can contribute to a traditional or Roth IRA.

For more information about educational IRAs, see

                                                                                                  Edited by: Peg Downey, CFP, NAPFA

                                                                                                                     Money Plans
                                                                                                                     Silver Spring, MD