Roth IRA and Traditional IRA | Retiring | HSBC

 

Roth IRAs and Traditional IRAs

What is an IRA (individual retirement account)?

An Individual Retirement Account (IRA) is a tax–advantaged retirement account that you own and control. Earnings generated can compound on a tax–deferred basis until withdrawal.

There are two types of IRAs: Traditional and Roth. Both types allow the same maximum annual contributions, based on your age. The maximum is reached when your combined contributions to all of your IRAs meets the limit. The two types of IRA differ in their qualifying criteria, withdrawal restrictions, and tax implications.

  • Traditional IRAs offer potential for tax-deductible contributions depending on your income level, participation in a workplace retirement plan, and marital status. Otherwise, contributions may be made post–tax.
  • Roth IRAs do not permit tax-deductible contributions. However, contributions with post-tax dollars can be withdrawn tax-free. If you are not eligible for tax-deductible contributions to a Traditional IRA due to a higher income, you may be eligible for a Roth IRA.

Compare Roth and Traditional IRAs side by side

Use the chart below to easily compare the features and qualifications of the two types of IRAs:

  Traditional IRA Roth IRA
Eligibility: Age You must be under age 70 ½ in the year the contribution is made No age limit
Eligibility: Income No income restrictions Generally, you can contribute to a Roth IRA if you have taxable compensation based on IRS set Modified AGI guidelines which can be viewed here under the Roth IRA contribution limit header.
Maximum Annual Contribution Individual: $5,500

Married filing jointly: $11,000 (up to $5,500 each)
Individual: $5,500

Married filing jointly: $11,000 (up to $5,500 each)
Catch up contribution If you are age 50 or older in the year of contribution, eligible IRA holders can make an additional contribution of $1,000 If you are age 50 or older in the year of contribution, eligible IRA holders can make an additional contribution of $1,000
Tax Implications: Contributions May be tax deductible based on IRS guidelines which can be viewed here under the Claiming a tax deduction for your IRA contribution header. Contributions are not tax deductible
Tax Implications: Earnings Earnings are tax-deferred until withdrawn

Earnings are not subject to federal tax penalties if withdrawn after age 59½ and held for 5 years

Earnings are tax-free if taken as part of a qualifying withdrawal
Tax Implications: Withdrawals After age 59½, withdrawals are not subject to federal tax penalties, but may be subject to federal and state income taxes except under certain circumstances which can be found here. Contributions can be withdrawn at any time without penalty as long as held for five years except under certain circumstances which can be found here.
Age for Required Distributions Distributions must begin by April 1 of the year after turning age 70½. Required minimum distributions are determined by dividing the prior year–end fair market value of the retirement account by the applicable distribution period or life expectancy There is no mandatory age for taking distributions

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Investment, Annuity and Insurance Products:
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All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor.

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United States persons (including U.S. citizens and residents) are subject to U.S. taxation on their worldwide income and may be subject to tax and other filing obligations with respect to their U.S. and non–U.S. accounts – including, for example, Form TD F 90–22.1 (Report of Foreign Bank and Financial Accounts ("FBAR")). U.S. persons should consult a tax adviser for more information.

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