I am often asked, “Should I have a traditional IRA or a Roth IRA?” My answer is, “It depends.” Both are great options for retirement saving but neither is a “one size fits all” solution.
A Traditional IRA is a “tax deferred” retirement savings vehicle. You receive a tax deduction when the money goes in and do not pay any tax as the money grows. You will pay taxes when the money comes out. The advantage to putting money in a traditional IRA is that you can reduce your adjusted gross income now and avoid paying a higher tax rate due to your higher income. As a retiree, your income will likely be lower. You will be in a lower tax bracket and you can pay taxes on the money you withdraw at that lower rate.
A Roth IRA works a lot like a Traditional IRA, only in reverse. In a Roth, the money you put in is after tax money. Once the money is in a Roth, it is likely never taxed again. You are not taxed on the growth and you do not have to pay any taxes when you take the money out.
Both have Pros and Cons:
- You are limited on how much you can contribute each year. The contribution limit for both Traditional and Roth IRAs is slightly higher if you are 50 or older.
- For both options you must have wage income.
- Traditional IRA contributions are not permitted after the age of 70 ½.
- Roth IRAs do not have an age restriction.
- Traditional IRAs have required minimum distributions (RMDs) beginning at age 70 ½. These are required withdrawals and are taxed.
- Roth IRAs do not have RMDs but do require that the money is held in the account for at least 5 years
- Both penalize withdrawals before the age of fifty-nine and one half, but, a Roth IRA will allow you to withdraw the amount that you originally contributed without penalty.
Which IRA is best for you? It depends on your current tax bracket and what your potential tax bracket will be in the future.
If you have more questions about the difference between a Traditional IRA and a Roth IRA or you would like to discuss which option might be best for you, give us a call and we would be happy to discuss it with you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Early withdrawals may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Early withdrawals may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.