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LEARN MORE ABOUT: IRA Accounts

INVESTING IN A GOLD IRA: Gold IRA Account

INVESTING IN A SILVER IRA: Silver IRA Account

REVEALED: Best Gold Backed IRA

When planning for retirement, one of the biggest decisions is choosing between a Traditional Individual retirement account (IRA) or a Roth IRA. Both of these accounts offer tax advantages specifically for retirement savings, but they differ in some key ways.

Firstly, Traditional IRAs allow individuals to deduct contributions from their taxable income in the year the contribution is made. The money grows tax-deferred, meaning individuals do not pay taxes on it until they withdraw the money during retirement. At this point, the individual will pay taxes on the withdrawals as they are taxed at their then-current income tax rate.

In contrast, Roth IRA contributions are made with after-tax funds, and therefore are not tax-deductible in the year of contribution. However, the money in a Roth IRA grows tax-free, and individuals will not pay taxes on qualified withdrawals in retirement. This makes Roth IRAs an excellent option for those who anticipate being in a higher tax bracket during retirement because they have already paid taxes on the funds.

Another distinction between the two types of IRAs is when individuals must withdraw their money. With a Traditional IRA, individuals must begin taking required minimum distributions (RMDs) at age 70½, even if they don’t need the money at that time. Conversely, Roth IRAs have no age requirement for distributions, therefore they can be kept untouched, grow tax-free and can potentially be passed down to heirs without being taxed should the owner die.

There are income limitations for Roth IRA contributions. For 2021, individuals with a modified adjusted gross income (MAGI) of $198,000 or less ($125,000 or less for single filers) can contribute up to $6,000 annually ($7,000 for individuals 50 years or older). Those with higher incomes are gradually phased out of eligibility to contribute to a Roth IRA. In contrast, Traditional IRAs do not have income limitations for contributions, but the amount contributors can deduct may be limited based on their taxable income.

In conclusion, both Traditional and Roth IRAs offer tax advantages for retirement savings. The choice between the two depends on individual circumstances such as tax bracket, anticipated future tax rates, and longevity planning. If an individual anticipates being in a higher tax bracket during retirement, a Roth IRA may be the better option, while a Traditional IRA may be a good choice if they anticipate being in a lower tax bracket. It is advisable to consider consulting with a financial planner to help you make the right choice for your retirement.