What is an IRA? Roth IRA and Traditional IRA explained | 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 However, contributions with post-tax dollars can be withdrawn tax-free.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 Those with 2015 modified adjusted gross income (MAGI) below $116,000 if single, or $183,000 if married and filing jointly may make full contribution.

Those with 2015 MAGI equal to or greater than $116,000 but less than $131,000 if single, or equal to or greater than $183,000 but less than $193,000 if married and filing jointly; or if married filing separately and less than $10,000 you may make partial contributions.

Those with 2015 MAGI equal to or greater than $131,000 if single or $193,000 if married and filing jointly; or married filing separately and $10,000 or more are ineligible to contribute.
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 If you do not participate in an employer sponsored retirement plan, such as a 401(k), contributions are:

  • Fully deductible up to the amount of your contribution limit if you are single or married and your spouse is not covered by a plan at work
  • Fully deductible up to the amount of your contribution limit if you are married filing jointly and your spouse is covered by a plan at work and your 2015 MAGI is $183,000 or less
  • Partially deductible if you are married filing jointly and your spouse is covered by a plan at work and your 2015 MAGI is greater than $183,000 but less than $193,000: or if you are married filing separately and your spouse is covered by a plan at work and your 2015 MAGI is less than $10,000
  • Not deductible if you are married filing jointly and your spouse is covered by a plan at work and your 2015 MAGI is equal to or greater than $193,000; or if you are married filing separately and your spouse is covered by a plan at work and your 2015 MAGI is $10,000 or more


If you do participate in an employer sponsored retirement plan, contributions are:

  • Fully deductible up to the amount of your contribution limit if you are single and your 2015 MAGI is $61,000 or less; or if you are married filing jointly and your 2015 MAGI is $98,000 or less
  • Partially deductible if you are single and your 2015 MAGI is greater than $61,000 but less than $71,000; or if you are married filing jointly and your 2015 MAGI is greater than $98,000 but less than $118,000; or if you are married filing separately and your 2015 MAGI is less than $10,000
  • Not deductible if you are single and your 2015 MAGI is equal to or greater than $71,000; or if you are married filing jointly and your 2015 MAGI is equal to or greater than $118,000; or if you are married filing separately and your 2015 MAGI is $10,000 or more
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

Withdrawals prior to age 59½ may be subject to federal and state income taxes, and a 10% federal tax penalty may apply except under certain circumstances such as:

  • You use the funds to purchase your first home ($10,000 lifetime limit)
  • You use the withdrawal to pay for certain higher education expenses
  • Certain conditions are met for qualifying medical or health insurance expenses
  • Withdrawals are made by your beneficiary after you die
  • You become totally and permanently disabled
  • Withdrawals are part of a series of substantially equal payments
Contributions can be withdrawn at any time without penalty as long as held for five years

Earnings withdrawn before age 59½ may be subject to federal and state taxes plus a 10% federal tax penalty, except under certain circumstances such as:

  • You use the funds to purchase your first home ($10,000 lifetime limit)
  • You use the withdrawal to pay for certain higher education expenses
  • Certain conditions are met for qualifying medical or health insurance expenses
  • Withdrawals are made by your beneficiary after you die
  • You become totally and permanently disabled
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

Call us at 866.586.4722 or email us to schedule a financial review.

Should You Convert to a Roth?

Did you know that anyone – regardless of income – can convert a Traditional IRA or distributions from different types of employer retirement plans to a Roth IRA? When evaluating a conversion, consider whether you have enough personal liquidity to avoid withdrawals from a Roth IRA in the first five years. If you must make such withdrawals after converting, the earnings portion is taxable, and the full amount of the withdrawal may be subject to a 10% IRS penalty, unless an exception applies.

After consultation with your independent tax advisor, a financial professional1 can help you assess conversion strategies and compare Roth IRA choices. Call us at 866.586.4722 or email us  for a financial review to explore the risks, benefits, and other considerations of converting your retirement plan to a Roth IRA.

1 Financial professional refers to Premier Wealth Advisors (PWA), Premier Relationship Advisors (PRA) and Financial Advisors (FA). PWA/PRAs primarily focus on a full suite of Premier products and services while FAs primarily focus on a full suite of Advance products and services. Both offer bank products through HSBC Bank (USA) N.A., investments and certain insurance products, including annuities, through HSBC Securities (USA) Inc. and traditional insurance products through HSBC Insurance Agency (USA) Inc.

Investment and certain insurance products, including annuities, are offered by HSBC Securities (USA) Inc. (HSI), member NYSE/FINRA/SIPC. In California, HSI conducts insurance business as HSBC Securities Insurance Services. License #: OE67746. HSI is an affiliate of HSBC Bank USA, N.A. Whole life, universal life, term life and health insurance products are provided by unaffiliated third parties and are offered through Insurance Agents of HSBC Insurance Agency (USA) Inc., which is a wholly owned subsidiary of HSBC Bank USA, N.A. Products and services may vary by state and are not available in all states. California license #: OD36843.


Investment, Annuity and Insurance Products:
ARE NOT A BANK DEPOSIT OR OBLIGATION OF THE BANK OR ANY OF ITS AFFILIATES ARE NOT FDIC INSURED ARE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY ARE NOT GUARANTEED BY THE BANK OR ANY OF ITS AFFILIATES MAY LOSE VALUE

All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor.

Research backgrounds of brokers and brokerage firms for free by visiting FINRA's BrokerCheck website

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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