Jack Driscoll discusses some of the differences with early withdrawals from a Traditional IRA vs. Roth IRA. Jack also discusses hardship provisions.

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When it comes to retirement, people want financial security to enjoy their golden years. Two popular options for retirement savings are Traditional IRAs and Roth IRAs. Each has its own benefits and drawbacks, and it’s essential to understand them before choosing which type of IRA to invest in.

Traditional IRA:

A Traditional IRA provides a tax deduction for the money invested in that year. The taxes deferred until the money is withdrawn during retirement. This option is ideal for those who expect to be in a lower tax bracket during retirement.

The contribution limit for Traditional IRAs in 2020 is $6,000 per year, with individuals over 50 allowed an additional $1,000 “catch-up” contribution.

Withdrawals from a traditional IRA are required starting at age 70½, and any withdrawal before that age will incur a 10% penalty. Withdrawals from a traditional IRA are also subject to income tax based on the individual’s tax bracket, which means it is essential to take into account future income and tax rates.

Roth IRA:

A Roth IRA allows investors to contribute after-tax income, with no tax break up front. However, withdrawals during retirement are tax-free. This option is ideal for those who are younger and expect to be in a higher tax bracket during retirement.

The contribution limit for Roth IRAs in 2020 is $6,000 per year, with individuals over 50 allowed an additional $1,000 “catch-up” contribution.

Unlike Traditional IRAs, there is no mandatory withdrawal age for Roth IRAs. This means that funds can grow tax-free indefinitely as long as the account holder is alive. Additionally, Roth IRAs do not require withdrawals during the account holder’s lifetime, and the funds can be passed down to heirs.

Financial Hardships:

While both Traditional and Roth IRAs have their benefits and drawbacks, both offer some flexibility in case of financial hardship.

For Traditional IRAs, individuals can withdraw money without penalty for certain specific reasons, such as medical expenses, higher education expenses, or a down payment on a first home. However, withdrawal for these reasons may still incur taxes on the amount withdrawn.

Similarly, Roth IRA holders can withdraw their contributions at any time without penalties or taxes, but earnings can only be withdrawn penalty-free after five years or when the account holder is 59½ years old.

In conclusion, both Traditional and Roth IRAs are excellent options for retirement savings, and the choice between the two depends on individual financial circumstances. It is essential to understand the differences between the two and consider future income and tax rates before making a decision. Additionally, having a plan in case of financial hardship can provide peace of mind and financial security in retirement.