What’s the one financial lesson Luke wishes he’d known about when he was younger?
The difference between a Traditional and a Roth IRA.
April is Financial Literacy Month and Eikenberry retirement planning is passionate about helping clients create the most tax efficient retirement. In this video, Luke and Erin break down the differences between the two and how you can determine which retirement account is right for you….(read more)

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April is Financial Literacy Month, which provides an opportunity to raise awareness about the importance of understanding personal finance. It’s also an excellent time to learn about the difference between a Roth and traditional Individual retirement account (IRA).

Both Roth and traditional IRAs are types of retirement accounts that allow individuals to save and invest money for their future. However, there are some key differences to consider when choosing between the two.

1. Tax Treatment

The primary difference between a Roth and traditional IRA is how they are taxed. Traditional IRAs allow individuals to contribute pre-tax income, which reduces their taxable income for that year. Any investment gains within the account also grow tax-free until distribution, at which point they are taxed as ordinary income. This means that when you withdraw money from a traditional IRA, you’ll be subject to income taxes on the full amount.

In contrast, Roth IRAs are funded with after-tax dollars, meaning that contributions are made with income that has already been taxed. However, any investment gains within the account grow tax-free and withdrawals in retirement are tax-free. This can be beneficial for individuals who expect to be in a higher tax bracket in the future, as they’ll be paying taxes at today’s rates rather than potentially higher rates in retirement.

2. Contribution Limits

Both Roth and traditional IRAs have limits on how much you can contribute per year. As of 2021, the contribution limit for both is $6,000 per year, with an additional $1,000 catch-up contribution allowed for those aged 50 or older.

However, the rules for deducting contributions to a traditional IRA may limit the amount you can contribute, based on your income level and whether you or your spouse have access to a retirement plan through work. For Roth IRAs, there are income limits for contributions, with the ability to contribute phasing out for single tax filers with income above $140,000 and married couples filing jointly with income above $208,000.

3. Required Minimum Distributions

A key difference between Roth and traditional IRAs is that traditional IRAs require individuals to start taking required minimum distributions (RMDs) at age 72. This is because the government wants to ensure that people are not using traditional IRAs as a way to avoid taxes indefinitely. RMDs are calculated based on your account balance and life expectancy, and failure to take them can result in a significant tax penalty.

Roth IRAs, on the other hand, do not have RMDs because they’ve already been taxed. This means that there’s no requirement to withdraw funds if you don’t need them, which can allow your investments to continue growing tax-free.

In conclusion, both Roth and traditional IRAs can be valuable retirement savings tools, but the right choice for you will depend on your unique circumstances. Understanding the differences between them is the first step to making an informed decision about which one is best for your financial situation. As we celebrate Financial Literacy Month, take the time to educate yourself on these and other important personal finance topics.