Northwestern Mutual financial advisor Lindsey Swenson explains the differences between a IRA and a Roth IRA. A ROTH IRA is akin to paying tax on the seed, not the harvest.

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Northwestern Mutual has been helping people and businesses achieve financial security for more than 165 years. Through a comprehensive planning approach, Northwestern Mutual combines the expertise of its financial professionals with a personalized digital experience and industry-leading products to help its clients plan for what’s most important. Northwestern Mutual delivers financial security to more than five million people with life insurance, disability income and long-term care insurance, annuities, and brokerage and advisory services.

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Transcript:
So traditional IRA means that it’s a tax deduction when you put the money in. It’s going to grow and you pay the tax when it comes out at retirement time or whenever you take the money out of the account. A ROTH IRA means the money goes in after it’s already been taxed, so it’s going to grow and come out tax-free. So I grew up on a farm and my way of thinking about it is a ROTH IRA is like paying tax on the seed, not the harvest….(read more)

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Individual Retirement Accounts (IRAs) are a popular way for individuals to save for retirement. There are two main types of IRAs: traditional IRAs and Roth IRAs. While both offer tax-advantaged savings for retirement, there are key differences between the two that individuals should be aware of when deciding which type of account is right for them.

One of the main differences between a traditional IRA and a Roth IRA is how they are taxed. With a traditional IRA, contributions are typically tax-deductible in the year they are made, meaning that individuals can lower their taxable income for that year. However, withdrawals from a traditional IRA are taxed as ordinary income in retirement.

On the other hand, contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible. However, withdrawals from a Roth IRA in retirement are tax-free, as long as certain conditions are met. This can provide individuals with tax-free income in retirement, which can be particularly beneficial for those in higher tax brackets.

Another key difference between a traditional IRA and a Roth IRA is the age at which individuals are required to start taking withdrawals, known as required minimum distributions (RMDs). With a traditional IRA, individuals are required to start taking RMDs at age 72, regardless of whether they need the money or not. This can result in individuals being forced to withdraw money from their traditional IRA and pay taxes on it, even if they do not need the income.

In contrast, Roth IRAs do not have RMDs during the lifetime of the original account holder. This means that individuals can leave their money in a Roth IRA and allow it to continue growing tax-free for as long as they like, without being forced to take withdrawals. This can be advantageous for individuals who do not need the income from their Roth IRA and want to pass on a tax-free inheritance to their heirs.

In conclusion, the main difference between a traditional IRA and a Roth IRA is how they are taxed. Traditional IRAs offer tax-deductible contributions and taxable withdrawals, while Roth IRAs offer after-tax contributions and tax-free withdrawals. Additionally, Roth IRAs do not have RMDs during the lifetime of the original account holder, providing individuals with greater flexibility in when they take withdrawals. Ultimately, the choice between a traditional IRA and a Roth IRA will depend on an individual’s financial situation and retirement goals. It is important to carefully consider the differences between the two types of accounts and consult with a financial advisor to determine which option is best for you.