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Retirement Plans for Individuals

An Individual Retirement Account (IRA) is a personal savings plan that allows you to set aside money for retirement while offering tax advantages. You may be able to deduct some or all of your contributions to an IRA, and earnings are generally not taxed until they are distributed to you.

An IRA can be a smart way to invest for retirement if your employer doesn't offer a retirement plan or if you wish to supplement your other retirement investments, such as an employer-sponsored 401(k) or pension. You can also use an IRA as a rollover vehicle. IRA rollovers allow you to transfer funds from one eligible retirement plan, such as your 401(k) plan at work, to your own IRA on a tax-free basis, subject to certain IRS limitations.

Traditional IRAs and Roth IRAs are popular retirement savings vehicles. Here's a summary of how they compare. Further information is available on the detail pages for each plan type.

  Traditional IRAs Roth IRAs
Who is eligible?
Individuals under age 70½ with earned income Individuals of any age with earned income, subject to IRS income limits
Annual
Contribution
(for 2017 & 2018)
  • Lesser of the contribution limit or 100% of compensation ($5,500; $6,500 if 50 or older)
  • Contribution limit is the maximum contribution between both Traditional and Roth IRAs
  • Lesser of the contribution limit or 100% of compensation ($5,500; $6,500 if 50 or older, subject to IRS income limits*)
  • Contribution limit is the maximum contribution between both Traditional and Roth IRAs
  • Never tax-deductible
Advantages
  • Tax-deferred growth
  • Contributions may be tax-deductible
  • Tax-deferred growth
  • No required minimum distribution (RMD) during lifetime
  • Contributions can be made after age 70½ with earned income
  • Distributions are income-tax free, subject to certain restrictions
Distributions Distributions are generally taxable. Distributions are generally income-tax free under the following conditions if the Roth IRA has been held for five years, and the distribution is:
  • Made after you attain age 59½
  • One that meets the exception for the qualified first-time home purchase (lifetime $10,000 limit)
  • Made to your beneficiary after your death
  • Made because you are disabled

If you're under age 59½, a 10% additional tax may apply. You may not have to pay a 10% additional tax under certain exceptions. This may include distributions related to:

  • Qualified higher education expenses1
  • Unreimbursed medical expenses in excess of 10% (in some instances 7.5%) of adjusted gross income
  • Payment of health insurance premiums if unemployed 
  • Substantially Equal Periodic Payments (SEPP)  
  • Death  
  • Disability  
  • Qualified first-time home purchase (lifetime $10,000 limit)    
  • Please consult with your tax professional or legal advisor to determine if your distribution qualifies for an exception to the 10% additional tax
Deadline to
Contribute
April tax-return deadline (extensions do not apply) April tax-return deadline (extensions do not apply)

Converting a Traditional IRA to a Roth IRA

Anyone can convert their Traditional IRA to a Roth IRA regardless of income. You generally will be required to pay federal income tax as a result of the conversion, but future distributions from your Roth IRA may not be taxable as long as certain requirements are satisfied (such as meeting the five-year holding period and attaining age 59½ as outlined in the table above).

 

Conversion Details

  • Anyone, regardless of their earnings, can convert their Traditional IRA (or rollover other qualified retirement plan assets, if eligible) to a Roth IRA.
  • Converting assets to a Roth IRA is a taxable event, with the taxes due for the tax year in which you made the conversion.
  • There is no limit to how much you can convert to a Roth IRA; however, the income limits for regular Roth IRA contributions remain in effect.
  • Regardless of your Modified Adjusted Gross Income (MAGI), you have the flexibility to convert a portion of your assets each year, thereby spreading the tax liability over time.


Is a Roth conversion right for you?

Generally, a Roth IRA conversion may be appropriate if you want to minimize income taxes in retirement or potentially pass tax-free assets to your beneficiaries. If you think you might be in a higher income-tax bracket in retirement, paying taxes now can save you from paying taxes later at a potentially higher rate.

Due to the income tax consequences triggered by a Roth conversion, be sure to discuss with your financial advisor and tax professional whether a conversion makes sense for your particular situation.

Retirement Planning

Financial planning can be complex. We provide information and strategies to help you navigate the world of investing.

Learn more >


1Generally include tuition, books, supplies, equipment at an eligible educational institution.

*Your Roth contribution might be limited or not be allowed based on your filing status and income.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

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