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 up front. 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.
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1) Income limitsContributions 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.
2) Age limitsThe 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.
3) Plan participationYour 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.
4) Required minimum distributionsThe 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.
