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Have you decided to open an IRA (Individual retirement account) but you’re not sure whether you should open a Traditional or ROTH IRA? Should you pay taxes now and get it over with or should you wait until you retire to pay taxes? Will your taxes be lower at retirement? In this video, I explain what’s an IRA, the difference between a Traditional and ROTH IRA, and how to pick the right one for you!
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Which IRA is Right for You? Traditional vs. Roth IRA Explained!
Saving for retirement is a crucial financial goal that everyone should prioritize. Fortunately, there are various retirement accounts available to help individuals save for their golden years. Two popular retirement account options are the Traditional IRA and the Roth IRA. Understanding the key differences between these two types of accounts can help you make an informed decision about which IRA is right for you.
1. Traditional IRA:
A Traditional IRA allows individuals to make tax-deductible contributions to their retirement savings. The contributions grow tax-deferred until they are withdrawn during retirement. One advantage of a Traditional IRA is that contributions made today can be deducted from your taxable income, potentially reducing your current tax bill. However, when you withdraw funds during retirement, they are subject to federal income tax at your ordinary income tax rate.
2. Roth IRA:
A Roth IRA, on the other hand, works a little differently. Contributions to a Roth IRA are not tax-deductible, meaning they are made with after-tax dollars. However, the major advantage of a Roth IRA is that qualified withdrawals during retirement are completely tax-free, as long as certain criteria are met. This means that the contributions and the growth within the account can be withdrawn without incurring any additional taxes.
3. Income Limitations:
One important consideration when choosing between a Traditional and Roth IRA is your income level. Traditional IRAs have no income restrictions for contributions, meaning anyone with earned income can contribute. However, Roth IRAs have income limitations. In 2021, if you are single and your modified adjusted gross income (MAGI) exceeds $140,000, or if you are married and your MAGI exceeds $208,000, you may not be eligible to contribute to a Roth IRA. Keep in mind that these income limits can change over time, so it’s always good to double-check with the current tax regulations.
4. Required Minimum Distributions (RMDs):
Another factor to consider is Required Minimum Distributions (RMDs). Traditional IRA owners are required to start taking withdrawals from their account once they reach age 72, which can potentially increase their taxable income during retirement. Roth IRAs, on the other hand, do not have mandatory distributions. This flexibility can be advantageous for those individuals who wish to let their Roth IRA continue growing tax-free for as long as possible.
5. Future Tax Rates:
When deciding between a Traditional or Roth IRA, it’s also essential to consider your expected future tax rates. If you anticipate being in a lower tax bracket during retirement, a Traditional IRA may be more beneficial, as you can take advantage of the tax deduction now. However, if you expect to be in a higher tax bracket when you retire, a Roth IRA may be a better choice since you won’t owe any taxes on your withdrawals.
Ultimately, the decision between a Traditional IRA and a Roth IRA depends on various factors individual to each person’s financial situation and goals. It’s wise to consult with a financial advisor or tax professional to determine the best choice for you.
Regardless of which IRA you choose, both provide valuable opportunities to save for retirement. Starting early and contributing regularly to your IRA can help ensure a secure financial future during your golden years.
New subscriber here, great content! What banks do you recommend opening a Roth IRA at?
Can one have both a Roth and traditional IRA and contribute to each simultaneously? I.e. 6k in one and 6k in the other for a total of 12k or are you just limited to one or the other?
So as a starter I’m guessing the Roth IRA would be best for me. I say this because of the fewer restrictions and having a child entering into college within the next five years if I needed to withdraw for his higher education. Would the Roth be better suited for me in your opinion?
Thank you so much for this video! Extremely helpful!
Thank you for the informative video. Best wishes.
Your past video inspired me to invest the full $6000. I have $1000 more to go!
Thank you, Focused Spender for this information. Question: As one draws near to their retirement horizon (i.e. 10-15 years or less), and the investor's income level is virtually at a near plateau, at this stage should the investor be also concern about the future trends in inflation rates and cost of living expenses? If these two factors are expected to increase then would it be advantageous in investing in a Roth IRA ( tax free/post tax) vice a Traditional IRA (tax deferred/pre-tax) instrument? I look forward to your reply , and I appreciate your work/content on your YT channel.
Hi Focused Spender. I'm mainly interested in having an IRA to increase my deductible when doing my tax returns. Based on your video, I'm guessing the Roth IRA would do that since I would be paying more in taxes (more taxes = higher deductible), but I wanted to ask to make sure. Is that correct? Thanks for the vid!
I mostly invest in a Roth but this year I'm invest 3k in my Roth and 3k in my traditional to lower my taxable income.
Is the $6000 for each type of account or for 401k, Traditional, and Roth?
Thanks for the educational and thoughtful content. Helpful stuff