Personal Banking

Which Type of IRA is Better for You?


What is the difference between a Traditional IRA and a Roth IRA?

  • Traditional IRA - The traditional IRA is an account that allows you to defer taxes on the earnings on your contributions until they are withdrawn. Also, certain contributions are tax deductible in the year for which they are made.

  • Roth IRA - The Roth IRA allows only nondeductible contributions and features tax-free withdrawals for certain distribution reasons after a five-year holding period. Since Roth IRA contributions are nondeductible and taxed in the year they are earned, if you expect to be in a higher tax bracket when you retire, you may benefit more from a Roth IRA than from a traditional IRA.

Am I eligible for either account?

  • Traditional IRA - If you are younger than age 70 1/2 for the entire tax year and have earned income (or your spouse has earned income), you are eligible to establish a traditional IRA.

  • Roth IRA - There are two requirements for eligibility to contribute to a Roth IRA: you must have earned income (or your spouse must have earned income), and your modified adjusted gross income (MAGI) cannot exceed certain prescribed limits.

    You are eligible to establish a traditional or Roth IRA even if you already participate in or are receiving contributions from a retirement plan sponsored by your employer, which may include certain government plans, tax-sheltered annuities, Simplified Employee Pension (SEP) plans, Savings Incentive Match Plans for Employees of Small Employers (SIMPLE), or qualified plans.

How much can I contribute each year?

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increased the contribution amounts for both traditional and Roth IRAs. EGTRRA further increased contribution amounts for IRA owners who attain age 50 or older by the end of the year, allowing them to "catch-up" on their lost retirement savings.

Tax YearStandard LimitCatch-up AmountTotal Limit for Age 50 and Over
2002-2004$3,000$500$3,500
2005$4,000$500$4,500
2006-2007$4,000$1,000$5,000
2008$5,000$1,000$6,000
2009 & thereafter$5,000 + COLA*$1,000$6,000 + COLA*

*COLAs are potential cost-of-living adjustments each year starting in 2009.

You can contribute the lesser of the amount applicable to you each year or 100 percent of your earned income.

The chart shows the aggregate amount that you can contribute to any Roth and/or traditional IRA for each year. For example, if you are younger than age 50 and contribute $500 to a traditional IRA, the most you could contribute to a Roth IRA is $2,500 for 2002.

Roth IRA contributions are further limited by your MAGI. These prescribed limits are:
Single Filers
MAGI of $95,000 or Less MAGI Between $95,000 & $110,000 MAGI of $110,000 or More
Full Contribution Partial Contribution No Contribution

Married, Joint Filers
MAGI of $150,000 or Less MAGI Between $150,000 & $160,000 MAGI of $160,000 or More
Full Contribution Partial Contribution No Contribution

What deductions are available?

  • Traditional IRA - Deductibility of your contribution is based on whether or not you are an active participant in an employer-sponsored retirement plan. For example, if you are single and not an active participant, you are eligible for a full deduction of your contribution, no matter how high your income. If you or your spouse are an active participant, the deductible amount is dependent on your MAGI and income tax-filing status. You may be eligible for the maximum deduction, a partial deduction, or no deduction. Your tax professional can help you determine whether your contribution is deductible. Even if you are not eligible for a deductible contribution, you can still make nondeductible contributions to a traditional IRA and take advantage of the tax-deferred earnings.

  • Roth IRA - None. Money contributed to a Roth IRA is taxable as income in the year it is earned.

Do I pay taxes on the earnings when distributed?

  • Traditional IRA - Yes. All earnings on your traditional IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account. They are then taxed as income in the year they are withdrawn.

  • Roth IRA - No, provided you withdraw the earnings as part of a qualified distribution. That's the best part of the Roth IRA. When you are ready to take a withdrawal, you pay no taxes on any of the earnings that your contribution has generated.

    A qualified distribution occurs when Roth IRA earnings are distributed after meeting the five-year holding period, and distributions are taken for any of the following reasons: after reaching age 59 1/2, permanent disability, a first-time home purchase, or in the event of your death.

    A nonqualified distribution occurs when Roth IRA earnings are distributed before meeting the five-year holding period and/or taken for reasons other than qualified reasons. Nonqualified distributions of earnings will be subject to tax.

When can I withdraw funds without incurring the 10 percent premature-distribution penalty tax?

  • Traditional IRA - You can withdraw funds from your traditional IRA without incurring the 10 percent premature-distribution penalty tax any time after you reach age 59 1/2. You can avoid the penalty tax before age 59 1/2 for the following reasons: disability, substantially equal periodic payments, medical expenses in excess of 7.5 percent of your adjusted gross income, health care insurance if you have been receiving unemployment compensation for at least 12 weeks, distributions paid directly to the IRS due to an IRS levy, conversion to a Roth IRA, recharacterization, rollover to a qualified plan, qualified higher education expenses, or a first-time home purchase.

  • Roth IRA - The 10 percent premature-distribution penalty tax does not apply before age 59 1/2 for the withdrawal of earnings or for converted assets withdrawn within five years of the conversion for the following reasons: disability, substantially equal periodic payments, medical expenses in excess of 7.5 percent of your adjusted gross income, health care insurance if you have been receiving unemployment compensation for at least 12 weeks, distributions paid directly to the IRS due to an IRS levy, recharacterization, qualified higher education expenses, or a first-time home purchase.

    Roth IRA distributions of regular and spousal contribution amounts are always free of penalty tax - regardless of timing or reason.

How are funds taxed at distribution?

  • Traditional IRA - All distributions are fully taxable unless you made nondeductible contributions. That portion of the distribution is not taxable when withdrawn.

  • Roth IRA - Qualified distirbutions of earnings from a Roth IRA are not subject to federal income taxes, however state taxes may apply. Nonqualified distributions of earnings are subject to income tax.

    Since regular and spousal Roth IRA contributions are nondeductible, and converted assets are fully taxable in the year of conversion, distributions of these amounts are not taxable.

When must I withdraw funds?

  • Traditional IRA - When you reach your age 70 1/2 year, you must begin to take minimum required distributions or risk additional penalty taxes.

  • Roth IRA - You are not required to take distributions from your Roth IRA.

Why don't I just open both accounts?

Great idea. Opening both a traditional IRA and a Roth IRA lets you develop your own blend of tax-deductible contributions to your traditional IRA and nondeductible contributions to your Roth IRA. You can decide which is a greater priority for you: minimizing your taxes now through a deduction or minimizing your taxes in the future with tax-free earnings.

How do I find out more about traditional and Roth IRAs?

See any of our customer service representatives who will explain the nature of these accounts and help you complete the forms necessary to establish your traditional or Roth IRA.

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