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As the name suggests, an Individual Retirement Account (IRA) can help you save and invest for retirement. Depending on which type you select, traditional or Roth, you’ll receive certain tax and savings advantages— powerful tools to help you with your retirement goals. But as you’ll see below, there are several differences between traditional and Roth IRAs. Learning about them can help you decide which is better for you.
Saving For Retirement:
Two Approaches
Contributions
Traditional IRA
- Must generally be from employment compensation.
- May be tax-deductible, potentially lowering your taxable income.
Roth IRA
- Must generally be from employment compensation.
- Grow tax-free.
- Do not lower your taxable income, and contributions are from taxable income.
Earnings
Traditional IRA
- Grow on a tax-deferred basis but are taxed upon withdrawal—typically during retirement, when most individuals are in a lower tax bracket.
Roth IRA
- Grow tax–free.
Withdrawals
Traditional IRA
- Can begin at age 59½ and a half without penalty, though ordinary income tax will generally apply; withdrawals taken before age 59½ and a half may incur a 10% penalty.*
- IRA owners age 70½ and a half or older can still transfer up to $100,005+ each year — plus a one‐time opportunity to use a qualified charitable donation of up to $50,000 to fund a split interest entity, — if you wanted to include this provision — directly to a charity unless they contributed to their IRA after age 70½ and a half, and then SECURE Act limitations apply.
Roth IRA
- Are tax-free provided they meet certain qualifications and requirements.
- If you’ve held a Roth IRA, including converted accounts, for less than five years and withdraw earnings before reaching age 59½ and a half, you may be subject to income tax and a 10% early withdrawal penalty.* Exceptions to the penalty for early withdrawal are the same as those with a traditional IRA.
Required Minimum Distributions
Traditional IRA
-
Initial required minimum distribution must be taken by April 1 of the year
following the year you turn 73 and be taken by December 31 each year thereafter.
However, if you turned 72 on or before December 31, 2022, your initial required minimum distribution must
have been taken by April 1 of the year following the year you turn
72 and be taken by December 31 each year thereafter, which will continue.*
If you were born prior to July 1, 1949, you must withdraw at least the required minimum distribution amount from your IRA by December 31, 2021. If you were born between July 1, 1949 and December 31, 1949, you may take your distribution for tax year 2021 no later than April 1, 2022. Please note that if you choose to defer your 2021 minimum distribution until April 1, 2022, you will also need to take the required minimum distribution for tax year 2022 by December 31, 2022.
Roth IRA
- No required minimum distributions. The absence of RMDs can help with estate building.*
- However, if you are the beneficiary of a Roth IRA, you may have to take distributions.*
Income Eligibility Limits
Traditional IRA
- None, but if covered by a workplace retirement plan or your spouse is covered by one, income limits apply for deducting annual contributions.
Roth IRA
- Various limits apply.
- Please see the IRS website for current information. https://www.irs.gov/retirement-plans/traditional-and-roth-iras
Benefits Common to Both
- Penalty-free early withdrawals when certain conditions are met.
- The ability to make “catch-up” contributions if age 50 or above.
- Nonworking spousal contributions.
- The option to invest in different financial instruments, such as stocks, bonds, mutual funds, ETFs, CDs and money market funds subject to product availability at the financial institution holding your account.
Accessing Your Money
Accessing Your Money
Traditional IRA
Withdrawals are permitted at any time and subject to ordinary income tax. But withdrawals taken before age 59½ and a half will also incur a 10% penalty for early withdrawal.*
Penalty-free conditions include:
- Death or disability
- Qualified higher education expenses
- Qualified birth or adoption distributions of not more than $5,000 within 1 year of the birth or adoption which may be repaid without regard to the 60 day rollover time limit. To qualify as a rollover, it must be repaid within three years of the distribution. Such distributions made prior to December 22, 2022 must be repaid by December 31, 2025 to constitute a rollover.
- First-time home purchase (up to $10,000)
- Medical insurance premium payments due to a period of unemployment
- Qualified reservist distribution
Roth IRA
Contributions can be withdrawn at any time without taxes or penalties. If you’ve held a Roth IRA, including converted accounts, for less than five years and withdraw earnings before reaching age 59½ and a half, you may be subject to income tax and a 10% early withdrawal penalty.* Exceptions to the penalty for early withdrawal are the same as those with a traditional IRA, and qualified birth or adoption distributions may similarly be repaid without regard to the 60 day rollover time limit. To qualify as a rollover, the amount must be repaid within three years of the distribution. Such distributions made prior to December 22, 2022 must be repaid by December 31, 2025 to constitute a rollover.
To Get Started
Citi Global Wealth is committed to helping you work toward your financial objectives and a more secure future. To learn more about strategies that may help you reach your goals, speak to a Citi Global Wealth Financial Advisor.
Before You Act
Know the Rules on IRA and Retirement Plan Rollovers
If you’re considering rolling over money from an Individual Retirement Account (IRA) or employer retirement plan, make sure you understand the rules before making a decision, including that you may be able to leave your money where it is. Here’s a brief summary:
Employer Retirement Plans
When leaving an employer, you typically have four options on what to do with your retirement benefit in an employer sponsored retirement plan (and may engage in a combination of these options):
- Leave the money in the former employer’s plan, if permitted;
- Roll over the assets to a new employer’s plan, if one is available and rollovers are permitted;
- Roll over to an IRA (traditional or Roth); or
- Cash out the account value.
In many cases, you don’t have to act immediately upon switching jobs or retiring. The decision to transfer funds out of an employer's plan is irrevocable. Before making a decision, take time to assess factors such as your age, financial needs, personal situation, fees and expenses, investment options and services.
IRA Rollovers
Unlike employer retirement plans, IRAs have different rules on rollovers, including that you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.
To learn more about rollover rules, speak with one of our Citi Personal Wealth Management Financial Advisors, who follow practices and procedures to ensure clients are receiving the most appropriate guidance for their individual situations.
The transfer, rollover and withdrawal of retirement assets in IRAs, 401(k)s and other types of qualified accounts are governed by specific rules and laws and may involve significant tax consequences and limitations. Before making any decisions regarding the disposition of your retirement accounts, please consult your tax advisor or accountant.