While there are currently 11 different types of Individual Retirement Accounts (IRAs), there are two most investors are more familiar with than all the others, the Traditional IRA (T) and the Roth IRA (R). Each of these retirement accounts have similarities, but for the most part, they are vastly different. A quick review of these differences should help people make sure they are targeting the proper type of account.

Eligible Participants
The eligibility guidelines for both IRAs differ as follows.(T) In order to be eligible to open a Traditional IRA, the investor has to have some form of qualifying income (wages, salaries, bonuses, commission, self-employed, etc.) with no access to an employer sponsored qualified retirement investment plan such as a 401K or 403B account.(R) Roth IRAs are designed for individuals who are eligible and/or don’t qualify for another qualified plan, but want to invest in an additional type of retirement savings plan.

Contributions Based on 2014 IRS Guidelines)
Contributions under both plans are capped at a statutory limit of $5,500 per investor under 50 years of age. Investors 50 or older might qualify to make up to an additional $1,000 contribution under the “catch-up” provision. Married couples equal two separate accounts under both plans, in which case the combined contributions cannot exceed their aggregate income as long as they file joint returns. The two plans have these different contribution guidelines.

(T) For Traditional IRAs,

• The taxes on these contributions are deferred until distribution(s) are taken.
• If the investor wishes to invest additional monies exceeding the statutory limit, they may do so with after-tax dollars.
• Contributions are allowed only until 70 1/2 years of age.

(R) For Roth IRAs,

• The contributions must be made with after-tax dollars.
• Additional contributions beyond the statutory limits are not allowed.
• The statutory limit is valid as long as the individual makes $114,000 or less ($181,000 or less for married couples). If the individual make between $114,001-$129,000 ($181,001-$191,000 for married couples), the amount allowed is proportionately decreased until it reaches zero at $129,001 ($191,001 for married couples).
• No age limits on contributions.

Distributions
The guidelines for withdrawals are quite different under both plans.

(T) For Traditional IRAs,

• Distributions can begin at age 59 1/2, but by no later than age 70 1/2
• All distributions, including earnings, are subject to taxes based on the taxpayers current tax rates.
• All distributions taken prior to 59 1/2 years of age are subject to a 10% penalty unless taken under the exception guidelines
• If distributions are taken from an account with both pretax and after-tax contributions, the IRS provides a calculation to determine which portion is taxable.

(R) For Roth IRAs,

• Distributions can be taken at anytime after age 59 1/2
• All distributions taken after age 59 1/2, including earnings, are tax exempt.
• All distributions taken prior to 59 1/2 years of age and/or within 5 years of opening the account are subject to the same 10% penalty, plus the earned income becomes taxable based on current rates unless taken under exception guidelines. Note: The exception guidelines can save the penalty and taxes under the age parameters, but not under the 5-year rule.

When choosing to invest in one of the above IRAs, it is important to understand these differences. Any mistake could trigger tax problems that no one enjoys having to encountering. Both types of IRAs are designed to help investors prepare for retirement.