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What are the differences between a Traditional and Roth IRA?

The main difference between a Traditional and a Roth IRA is when you pay income taxes on the money you put in the plans.

With a Traditional IRA, your contribution is tax deductible (with a few exceptions outlined by the IRS here) and you don’t pay taxes on the contribution amount until you later withdraw it (either upon retirement or early with a penalty).

A contribution to a Roth IRA is not tax deductible; you pay taxes before the contribution, but you do not pay taxes later on the amount you withdraw. In addition, with a Roth IRA, you can leave the money in for as long as you want, letting it grow as you continue to age. With a Traditional IRA, by contrast, you must start withdrawing the money when you reach age 70½.

Roth IRA contributions are limited by income level. In general, you can contribute to a Roth IRA for 2016 if you have taxable income and your modified adjusted gross income is either:

  • Less than $194,000 if you are married filing jointly;
  • Less than $132,000 if you are single, head of household, or married filing separately (if you did not live with your spouse at any time during the previous year); or
  • Less than $10,000 if you’re married filing separately and you lived with your spouse at any time during the previous year.

For more information on contribution limits, please refer to the IRS website.

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Wealthfront and its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisor. Financial advisory and planning services are only provided to investors who become clients by way of a written agreement. All investing involves risk, including the possible loss of money you invest. Past performance does not guarantee future performance.

Wealthfront prepared this article for informational purposes and is not intended as tax advice nor as an offer, recommendation, or solicitation to buy or sell any security. Wealthfront does not represent that any strategy will result in any of the outcomes described, including the effectiveness of any strategy in reducing tax liability, as this depends on an investor’s specific tax and investment profile. Investors are encouraged to consult their personal tax advisors regarding their unique circumstances and any outcomes/consequences that may result from any investment strategy. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

Wealthfront and its affiliates may rely on information from various sources we believe to be reliable (including clients and other third parties), but cannot guarantee its accuracy or completeness. See our Full Disclosure for more important information. Financial advisory and planning services are only provided to investors who become clients by way of a written agreement. All investing involves risk, including the possible loss of money you invest. Past performance does not guarantee future performance.

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