Traditional IRA vs Roth IRA- what are the differences and what’s best for you? Listen in to learn more and give us a call if you’re ready to chat! 👍…(read more)

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Traditional IRA vs Roth IRA: Which retirement account is Right for You?

When it comes to saving for retirement, two popular options are the Traditional Individual retirement account (IRA) and the Roth IRA. Both of these retirement accounts offer distinct benefits and it’s important to understand the differences between them before choosing the one that aligns with your financial goals and retirement plans. In this article, we will explore the key features and advantages of both Traditional and Roth IRAs to help you make an informed decision.

The Traditional IRA is a tax-deferred retirement account that allows individuals to contribute pre-tax income up to a certain limit. The contributions are tax-deductible in the year they are made, potentially providing a reduction in your taxable income. The earnings on those contributions grow tax-deferred until you begin withdrawing funds during retirement. However, any withdrawals made from a Traditional IRA during retirement are subject to income taxes. Additionally, once you reach the age of 72, you must start taking required minimum distributions (RMDs) from your Traditional IRA.

On the other hand, the Roth IRA offers a different tax advantage. Contributions to a Roth IRA are made with after-tax dollars, meaning that you won’t receive an immediate tax deduction for your contributions. However, the withdrawals made during retirement from a Roth IRA are tax-free, including both the contributions and the earnings, as long as you have held the account for at least five years and are over 59 ½ years old. Unlike the Traditional IRA, there are no mandatory RMDs with a Roth IRA, allowing you to keep growing your savings tax-free for as long as you wish.

While the tax aspects are the most significant differences between the two types of retirement accounts, they also have varying rules regarding income eligibility. Anyone with earned income can contribute to a Traditional IRA, regardless of their income level, but the tax deduction for the contributions may be limited if you or your spouse are covered by a retirement plan at work and your modified adjusted gross income (MAGI) exceeds certain thresholds. On the other hand, a Roth IRA has income limits for eligibility. As of 2021, single individuals with a MAGI of up to $125,000 and married couples filing jointly with a MAGI of up to $198,000 can contribute to a Roth IRA. However, above these thresholds, the contributions phase out until they are completely eliminated.

Another important factor to consider when deciding between a Traditional and Roth IRA is your current and expected future tax rate. If you anticipate being in a higher tax bracket during retirement, a Roth IRA may be a more advantageous choice for you. By paying taxes on your contributions now, you can avoid paying higher taxes on withdrawals in the future. Conversely, if you believe that your tax rate will be lower during retirement, a Traditional IRA might be more beneficial since you will receive the tax deduction upfront, potentially reducing your tax liability during your working years.

In summary, Traditional and Roth IRAs offer distinct tax advantages and eligibility requirements. The Traditional IRA provides tax deductions on contributions, tax-deferred growth, and taxable withdrawals during retirement. In contrast, the Roth IRA offers tax-free withdrawals, tax-free growth, and no mandatory withdrawals. While the decision ultimately depends on your individual financial circumstances and goals, it’s essential to carefully analyze your current tax situation, future expectations, and eligibility criteria to choose the retirement account that best suits your needs. Regardless of your choice, it’s always wise to consult with a financial advisor or tax professional to ensure that you are making informed decisions when it comes to your retirement savings.