Do you understand the differences between a Traditional IRA and a Roth IRA? Pure’s Financial Planner, Nick Rose, CFP®, breaks down the tax benefits, contribution limits, and phase out ranges for both IRAs to help you determine what option might be best for your financial situation.

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As we approach the year 2023, many people are wondering about the differences between Traditional IRA and Roth IRA plans. Both of these retirement accounts are popular among investors, but they have different tax implications and eligibility requirements. The good news is that changes in tax laws and rules governing these plans are not expected to be extensive. However, here is what you need to know:

Traditional IRA vs. Roth IRA: Basics

A Traditional IRA is a tax-deferred retirement plan for individuals who want to save for retirement. Contributions are pre-tax, meaning that they are taken out of your paycheck before taxes are withheld. This lowers your taxable income for the year, which can result in a lower tax bill. However, you will have to pay taxes on the money when you withdraw it during retirement.

Roth IRAs, on the other hand, are funded with after-tax dollars. As a result, contributions are not tax-deductible. However, the money you withdraw during retirement is tax-free.

2023 Changes in Traditional IRA vs. Roth IRA

In 2023, the contribution limits for both Traditional and Roth IRA plans are likely to increase modestly. However, the exact amounts have not yet been announced by the Internal Revenue Service.

Also, as of 2023, holders of traditional IRA accounts who reach age 72 in that year will be required to begin taking required minimum distributions (RMDs). Until this time, the age requirement to take RMDs will remain age 70 ½.

Roth IRAs are not subject to RMDs, which means account holders can invest money in the account for their entire lives if they wish. Roth accounts are often a better choice for people who think they will be in a higher tax bracket during retirement than they are currently. Taxes are paid on the contributions (in the year they are made), and then the investment grows tax-free. Roth IRAs can also be a good choice for younger investors who can benefit from decades of tax-free compound interest growth.

Which is the Better Choice for You?

When it comes to choosing between Traditional and Roth IRA plans, there is no one-size-fits-all solution. You will need to evaluate your own financial situation, including current income, expected future income, and tax bracket.

If you think you may be in a lower tax bracket during retirement, a Traditional IRA may be a good choice for you. If, on the other hand, you expect to be in a higher tax bracket, you might want to consider a Roth IRA. However, everyone’s financial situation is unique, and you may want to speak with a financial advisor to help you decide which plan is best for you.

In conclusion, while there may be changes to contribution limits and RMD ages coming down the pipeline, the basics of Traditional and Roth IRA plans remain relatively unchanged. Do your research, determine your own needs, and make a decision that works best for your individual situation.