Listen to Keith Hall as he explains the difference between a Roth IRA and a Traditional IRA….(read more)

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When it comes to saving for retirement, there are several options available to individuals, including Roth IRAs and Traditional IRAs. Both accounts offer tax advantages and the opportunity to save for the future, but they have some key differences that individuals should consider when deciding which one is right for them.

A Traditional IRA allows individuals to contribute pre-tax dollars to their retirement savings, which means that they can deduct their contributions from their annual taxable income. This can result in lower tax liability for the year in which the contributions are made. The money in a Traditional IRA grows tax-deferred, meaning that individuals do not have to pay taxes on the investment gains until they begin making withdrawals in retirement. However, when withdrawals are made, they are subject to income tax.

On the other hand, a Roth IRA is funded with after-tax dollars, which means that contributions are not tax-deductible. However, the money in a Roth IRA grows tax-free, and withdrawals in retirement are also tax-free, provided that certain criteria are met. This can make a Roth IRA an attractive option for individuals who anticipate being in a higher tax bracket in retirement or who want to diversify their tax liability in retirement.

One of the key factors to consider when deciding between a Roth IRA and a Traditional IRA is an individual’s current tax situation and their expected tax situation in retirement. If an individual is currently in a higher tax bracket and expects to be in a lower tax bracket in retirement, a Traditional IRA may be more advantageous, as they can take advantage of the tax deduction on their contributions now and pay taxes on the withdrawals at a lower rate in retirement. On the other hand, if an individual is in a lower tax bracket now but anticipates being in a higher tax bracket in retirement, a Roth IRA may be a better choice, as they can pay taxes on the contributions now and enjoy tax-free withdrawals in retirement.

Another factor to consider is eligibility. While anyone with earned income can contribute to a Traditional IRA, there are income limits that determine whether an individual can contribute to a Roth IRA. For example, in 2021, individuals with a modified adjusted gross income (MAGI) of more than $140,000 (or $208,000 for married couples filing jointly) are not eligible to contribute to a Roth IRA. However, there are no income limits on the ability to convert a Traditional IRA to a Roth IRA, which means that individuals who exceed the income limits for contributing to a Roth IRA can still take advantage of the benefits of a Roth by making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA.

Ultimately, the decision to choose between a Roth IRA and a Traditional IRA is a personal one that depends on an individual’s unique financial situation, goals, and expectations for retirement. It may be beneficial to consult with a financial advisor to determine which option is best suited to an individual’s needs. Regardless of the choice, both Roth and Traditional IRAs offer valuable tax benefits and the opportunity to save for a secure retirement.