A crucial question that new business owners are better off knowing early on as possible, CPA Carter Cofield is here to explain what exactly an Individual retirement account is, its importance, and which direction to take based on your individual circumstance!

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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 it comes to saving for retirement, there are several options available to individuals. Two popular retirement savings vehicles are the Roth IRA and the Traditional IRA. Both offer tax-advantaged ways to save for retirement, but there are some key differences between the two. As a certified public accountant (CPA), I frequently get questions from clients about the best option for their individual circumstances, so I will explain the differences between the two to help you make an informed decision.

First, let’s talk about the Traditional IRA. With a Traditional IRA, contributions are typically tax-deductible, meaning you can lower your taxable income for the year in which you make the contribution. The contributions grow tax-deferred, meaning you won’t pay taxes on the earnings until you withdraw the funds in retirement. However, once you start taking distributions in retirement, those distributions are subject to income tax at your ordinary tax rate.

On the other hand, a Roth IRA offers a different tax advantage. Contributions to a Roth IRA are not tax-deductible, meaning you don’t get an upfront tax break. However, the earnings in a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. This can be a significant benefit for individuals who anticipate being in a higher tax bracket in retirement or for those who want to have tax-free income in retirement.

So, how do you decide between the two options? There are several factors to consider. If you anticipate being in a lower tax bracket in retirement, a Traditional IRA may be the better choice since you can take the tax deduction now and pay taxes at a lower rate later. However, if you expect to be in the same or a higher tax bracket in retirement, a Roth IRA may be more advantageous since you can pay taxes on the contributions now and enjoy tax-free withdrawals later.

It’s also worth noting that with a Traditional IRA, once you reach the age of 72, you are required to start taking minimum distributions from the account, whereas a Roth IRA has no required minimum distributions, allowing the funds to continue growing tax-free for as long as you like.

Additionally, there are income limitations for contributing to a Roth IRA that may make a Traditional IRA the only option for some individuals. For 2021, the ability to make a full contribution to a Roth IRA starts to phase out at a modified adjusted gross income (MAGI) of $125,000 for single filers and $198,000 for married couples filing jointly.

In conclusion, both the Roth IRA and the Traditional IRA offer tax advantages for retirement savings, and the best option for you will depend on your individual circumstances. Consider factors such as your current tax bracket, expected future tax bracket, and whether you want the flexibility of no required minimum distributions. Consulting with a CPA or financial advisor can also help you make an informed decision based on your specific financial situation.

Remember, the most important thing is to start saving for retirement early and consistently, regardless of which type of IRA you choose. Your future self will thank you for it.