Two of the most common self-directed IRAs available are traditional IRAs and Roth IRAs. They are very similar but do have some differences.
A traditional IRA allows you to contribute money to your retirement account without paying the taxes until you take out a distribution. With a traditional IRA, you must have earned income and you must open the account under the age of 70 and 1/2. The reason for this age limit is because after age 70 1/2 you can no longer contribute to the IRA.
There are contribution limits as well: for 2016 the contribution limits are $5,500 and if you are over the age of 50 you can contribute $6,500 a year. You have until April 15th the following year to contribute to your IRA for the current year. When you turn 70 and 1/2 you are required to take out minimum distributions which is based on the value of your account and your age. At age 59 and 1/2 you may start taking out distributions without penalty.
Traditional IRAs are generally best for people looking for a deduction on their taxes and do not have a qualified plan.
Roth IRAs are similar to traditional IRAs. They have the same contribution limits and filing deadline. For a Roth IRA, you must have earned income that does not exceed the IRS limits. The difference is when you are taxed on your money. For a Roth IRA, you are taxed when you contribute money to the account, therefore you get to take your distributions tax free.
Unlike traditional IRAs, there are no required minimum distributions. You may start taking money out tax-free after you’ve had the account open for five years, and there is no penalty if you are at least 59 and 1/2. Roth IRAs are generally best for people who are willing to pay taxes now in order to avoid taxes later.
There are some differences in traditional IRAs and Roth IRAs regarding income limit requirements for plan participation. While anyone can with earned income can open a traditional IRA, Roth plan eligibility requires earned income, but your modified adjusted gross income (AGI) cannot exceed the limits set for these plans.