What is the difference between a Roth and a Traditional IRA – Economics Insider #Shorts

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retirement planning is an essential aspect of financial planning. One of the most popular ways to save for retirement in the US is through an Individual retirement account (IRA). When it comes to IRAs, two types stand out- Roth and Traditional.

Both Roth and Traditional IRAs serve the same purpose-to help you save money for your retirement. However, there are several differences between the two.

The first and most significant difference is the tax treatment of contributions and withdrawals. Traditional IRAs allow you to contribute pre-tax dollars, which means that you can deduct your contributions from your taxable income. This reduces your current tax liability, and you only pay taxes on the withdrawals you make during retirement. In contrast, Roth IRAs require you to contribute post-tax dollars, which means you don’t get any tax deduction for your contributions. However, when you reach retirement age and make withdrawals, you don’t owe any taxes on these withdrawals.

Another significant difference between the two is the rules surrounding withdrawals. With Traditional IRAs, you must start taking Required Minimum Distributions (RMDs) when you reach the age of 72. These RMDs can impact the amount of Social Security tax you owe and can potentially push you into a higher tax bracket. On the other hand, with Roth IRAs, there are no RMDs, so you can withdraw your money at any age without penalty or tax.

The contribution limits for Roth and Traditional IRAs are the same. For 2021 and 2022, the maximum contribution limit is $6,000 if you’re under 50 years old and $7,000 if you’re 50 years or older. However, eligibility to contribute to each type of IRA differs. Traditional IRAs have income limits for tax deductibility, whereas Roth IRAs do not.

Another difference is the eligibility to contribute based on age. With Traditional IRAs, you can make contributions until the age of 72, after which you can no longer contribute. With Roth IRAs, you can make contributions at any age as long as you have earned income.

In summary, while Roth and Traditional IRAs are both designed for retirement savings, they each have different tax treatments, withdrawal rules, and eligibility requirements. It’s essential to understand these differences to determine which option suits your retirement planning needs the best. Consulting with a financial advisor is recommended to make an informed decision.