Please ensure Javascript is enabled for purposes of website accessibility

What Are the Differences Between a Roth IRA and a Roth Contributory IRA?

By Motley Fool Staff – Updated Oct 16, 2016 at 11:22AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's a matter of how your IRA is funded.

The Roth IRA is an important retirement savings tool for those looking to put away money for the future. The sooner you begin setting money aside for retirement, the longer you'll have to accumulate wealth for when you need it the most.

Traditional IRA
With a traditional IRA, you contribute money on a tax-free basis, provided that you meet certain IRS criteria. For 2016, the contribution limit for a traditional IRA is $5,500 for those under 50 and $6,500 for those aged 50 and older. You're free to start taking withdrawals from your IRA once you reach age 59-1/2, at which point you'll pay taxes on them, and if you access those funds before you hit 59-1/2, you'll be liable for a 10% penalty on whatever amount you withdraw.

Roth IRA
A Roth IRA works similarly to a traditional IRA, but the main difference is that your contributions are not made on a tax-free basis. Rather, you'll pay taxes up front on what you put in, but when you start taking withdrawals in retirement, those distributions will be tax-free. The contribution limits for a Roth IRA are the same as those of a traditional IRA, but if you earn too much, you may be deemed ineligible for a Roth IRA. For 2016, single tax filers earning $132,000 or more are ineligible for a Roth IRA; those who are married, file jointly, and earn $194,000 or more are ineligible as well.

As with a traditional IRA, if you hold a Roth, you can start taking distributions once you reach age 59-1/2, provided that the money has been in your IRA for at least five years. If you make withdrawals prior to that age, you'll pay a 10% penalty on your earnings, but not on your original contributions. It's possible to convert a traditional IRA to a Roth IRA, but in order to take tax-free distributions, you'll need to wait five years from the conversion date to withdraw funds.

Roth contributory IRA
The difference between a Roth IRA and a Roth contributory IRA is based on how the account is funded. A Roth IRA can be funded by converting a traditional IRA to a Roth or by opening up an account and making contributions directly. If your Roth IRA is funded by your direct, fresh contributions, then it is considered a contributory IRA.

Roth IRA withdrawals
If your Roth IRA consists solely of money you contributed directly, then you can take that money out early and avoid penalties and taxes. However, if you withdraw money before age 59 1/2, and before that money has been in your account for five years, then you'll be subject to taxes and penalties on the earnings portion. Let's say that over the course of a five-year period, you've contributed $2,000 a year to your Roth IRA for a total of $10,000, and your current balance is $14,000 because your contributions have generated an investment return. Now let's assume you're not yet 59 1/2 but want to withdraw some money nonetheless. If you withdraw just $10,000, you won't be taxed or penalized. If you withdraw the full $14,000, then you'll be subject to taxes and penalties on the $4,000 you didn't contribute directly.

There's a lot to know about IRAs. If you still have questions, or if you need tips on getting started or making the best choice for your situation, visit the Fool's IRA Center.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now


Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.