IRA Selector Help
Welcome to the IRA Selector™ provided by our partner Ascensus, Inc. Should you use a Traditional IRA or a Roth IRA to save for retirement? The answer to that question depends on a number of factors. The IRA Selector contains educational information and three calculators to help you evaluate which type of IRA will provide the greatest amount of income at retirement taking into consideration the pretax and after-tax effects of the these options.
Estimate and compare how much retirement income each type of IRA will generate.
If you do not need to distribute IRA assets for retirement income, the Roth IRA can be used as an effective wealth accumulation tool. Projections are provided for both first and second generation heirs.
Find the specific point at which converting a Traditional IRA or rolling over retirement plan assets to a Roth IRA becomes more beneficial than keeping assets in a Traditional IRA or a retirement plan.
These tools are designed for educational purposes only. It is not intended to be used as investment or tax advice. Because each individual's financial circumstances are unique, you should seek competent professional tax advice before deciding on any IRA option. By using this software, you agree to our Terms and Conditions.
Each of the following factors determines whether a Traditional IRA or a Roth IRA is the right choice for you.
- Anticipated tax rate at retirement
- Years to retirement
- Current tax rate
- Earnings rate assumptions
- Distribution plans at retirement
The difference between a Traditional and Roth IRA can be summarized by the following comparison.
|Traditional IRA:||Regular contributions may be tax-deductible|
|Roth IRA:||No deductions|
|Roth IRA:||Tax-free if used properly|
|Traditional IRA:||Includable in taxable income|
|Roth IRA:||Tax-free for qualified distributions|
The following charts explain the eligibility requirement for contributions.
|Eligibility Requirements for Contributions|
|Traditional IRA||1. Must have earned income
2. Must be under age 72
|Roth IRA||1. Must have earned income
2. Must be within limits
|Modified Adjusted Gross Income (MAGI) Limits for Roth IRA Contributions|
|Married, Filling Joint||$206,000|
|Married, Filing Separate||$10,000|
If your MAGI is under the applicable income limits, you may make a contribution to a Roth IRA as long as you have earned income.
You may annually contribute up to the lesser of
- 100 percent of earned income, or
- the statutory limit for the year ($6,000 in 2021)
The annual contribution limit is subject to cost-of-living-adjustments (COLAs).
In addition, if you are age 50 or older, an additional amount (called a catch-up contribution) may be contributed to your IRA. Your catch-up contribution can be up to $1,000 annually.
Individuals must make regular contributions to Traditional and Roth IRAs by the due date of their federal income tax returns (generally April 15), not including extensions. If the deadline for filing an individual's income tax return falls on a Saturday, Sunday, or legal holiday, he will have until the following business day to make his contribution.
Contributions made between January 1 and April 15 of one year for the previous year are called prior-year contributions.
You can distribute your Traditional IRA assets at any time, subject to taxes and penalties. Assets distributed from a Traditional IRA generally are included in gross income in the tax year that they are received unless one of the following apply.
- Distribution is rolled over or transferred to an IRA or other eligible retirement plan
- Distribution of excess contributions removed before the tax return due date, including extensions (but the net interest attributable to the excess is includable in gross income)
- Transfers or rollovers incident to divorce
- Distribution of nondeductible IRA contributions
Taxable distributions from a Traditional IRA are taxed as ordinary income.
10 Percent Early Distribution Penalty Tax
If a distribution is taken from your IRA before the day you attain age 59½, the distribution is included in your gross income and a 10 percent early distribution penalty tax applies. This penalty tax generally does not apply if a distribution is taken because of one of the following reasons.
- Rollover to another IRA or an eligible retirement plan
- Qualifying medical expenses
- Health insurance premiums for unemployed individuals
- First-time homebuyer expenses
- Qualified higher education expenses
- Substantially equal periodic payments
- IRS levy
- Qualified reservist distributions
Required Minimum Distributions
You are required to take distributions from your Traditional IRAs beginning the year you attain age 72. If you fail to take a required minimum distribution (RMD), you must pay a 50 percent excess accumulation penalty tax on the amount of the RMD that was not distributed. IRA distributions must begin by your required beginning date for RMDs, which is April 1 of the year following the year you attain age 72. Distributions for each subsequent year must be taken by December 31 of that year.
You can take
- the required amount or
- any amount greater than the required amount.
For more information about RMDs, see a tax advisor.
The taxation of a Roth IRA distribution depends on what assets are being distributed and whether the distribution is considered qualified or nonqualified.
A distribution from a Roth IRA may be taken tax-free and penalty-free if it is a qualified distribution. A qualified distribution is one that satisfies a five-year waiting period, beginning with the year for which you first contributed to a Roth IRA, and one of the following events occurs.
- Attainment of age 59½
- First-time homebuyer
If a distribution from a Roth IRA is not qualified, taxes and penalties may apply. To determine the taxation, you'll need to understand the ordering rules for a Roth IRA distribution.
Ordering Rules for Distributions
The ordering rules state that if a Roth IRA owner has made both contributions and conversion or retirement plan rollover contributions to Roth IRAs, the assets are distributed in the following order.
Second: Conversions and retirement plan rollovers (by year)
Contributions and conversion/plan rollovers are not subject to tax when distributed. In some circumstances, however, distributed conversion/plan rollover assets might be subject to the 10 percent early distribution penalty tax. Earnings are taxable and subject to the penalty tax in a nonqualified distribution. But if the distribution is qualified, none of the distributed assets are taxable.
It is your responsibility as a Roth IRA owner to determine the taxation of your Roth IRA distributions by filing IRS Form 8606, Nondeductible IRAs,with your income tax return.
Roth IRA owners are not required to take distributions (RMDs) from their Roth IRAs. Beneficiaries of Roth IRAs, however, generally are required to take distributions. Spouse beneficiaries may treat the inherited Roth IRA assets as their own, and if doing so, are not required to take distributions.
The annual regular contribution limit is the lesser of $6,000 (plus catch-up contributions, if eligible) or 100 percent of eligible compensation (generally earned income). IRA owners age 50 or older by the end of the tax year may increase their IRA contributions to help "catch-up" on their retirement savings, for a maximum contribution of $7,000. The contribution limit applies to all Traditional and Roth IRA contributions made for the year, in aggregate.
Roth IRA contribution eligibility depends on the individual’s (or if married, the individual and the spouse’s) modified adjusted gross income (MAGI) and income tax filing status. The amount that an individual is eligible to contribute is reduced if his MAGI falls within or below certain phase-out ranges.
The 2021 MAGI phase-out ranges are listed below.
|Filing Status||2021 MAGI|
|Single Filer and Head of Household||$125,000-$140,000|
|Married, Filling Joint||$198,000-$208,000|
|Married, Filing Separate||$0-$10,000|
The following specific details for Roth IRA contributions are based on 2021 figures.
- Single individuals with MAGI of $125,000-$140,000 may contribute the maximum annual contribution ($6,000, plus catch-up contributions up to $1,000 if eligible) to their Roth IRAs.
- Married individuals who file joint income tax returns with joint MAGI of $198,000-$208,000 may contribute the maximum annual contribution to their Roth IRAs.
- Married individuals who file separate returns with MAGI of less than $10,000 may make partial contributions to their Roth IRAs.
- The Basic Comparison calculator estimates whether a Traditional IRA or a Roth IRA would provide more assets at retirement.
- The Legacy Planner estimates which IRA will best benefit your beneficiary after your death.
- The Breakeven Analyzer estimates the time frame when one type of IRA becomes more beneficial than the other to save for retirement.