Which Individual retirement account (IRA) is right for you? Christo Schultz, MBA, CFP®, Senior Wealth Advisor, explains the difference between a Roth IRA and Traditional IRA. Disclosures: …(read more)

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

retirement planning can be intimidating, especially when it comes to choosing between Roth and Traditional IRAs. Both accounts offer distinct advantages and disadvantages, and the choice ultimately depends on individual circumstances and goals.

Traditional IRAs allow for tax-deferred contributions, meaning contributions are deducted from taxable income in the year they are made. The potentially high tax deduction can benefit those who are in a higher tax bracket and plan to be in a lower bracket during retirement. Withdrawals from a Traditional IRA are taxed as ordinary income, and there are penalties for withdrawing before age 59 ½.

On the other hand, Roth IRAs allow contributions to be made with after-tax dollars, meaning there is no immediate tax benefit. However, the earnings and withdrawals from a Roth IRA are tax-free, as long as the account has been opened for at least five years and the account owner is at least 59 ½ years old. This can be an attractive option for those who expect to be in the same or a higher tax bracket during retirement.

It is important to consider personal circumstances and goals when making a decision between Roth and Traditional IRAs. Factors such as age, income, tax bracket, and retirement plans can all impact which account is the best fit. Consulting with a financial advisor can be helpful in making an informed decision and creating a custom retirement plan.

In addition to the benefits and drawbacks of Roth and Traditional IRAs, there are also contribution limits to consider. In 2021, the contribution limit for both types of accounts is $6,000 for those under age 50, with an additional $1,000 catch-up contribution allowed for those over age 50.

In summary, both Roth and Traditional IRAs offer distinct advantages and drawbacks, and the best choice depends on individual circumstances and goals. Consulting with a financial advisor and considering contribution limits can help ensure a successful retirement plan.