Here is a quick tip video to help you understand the difference between a Traditional IRA & Roth IRA!
The biggest difference between a Traditional IRA & Roth IRA is how and when you get a tax break: The tax advantage of a Traditional IRA is that your contributions are tax-deductible in the year they are made. The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed.
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When it comes to planning for retirement, there are a variety of investment options to choose from – but two of the most popular are traditional and Roth IRAs.
So what is the difference between these two types of Individual Retirement Accounts, and which one might be right for you?
Traditional IRA
A traditional IRA is a retirement savings account where contributions are tax-deductible, but any withdrawals made in retirement will be taxed as income. This means that you get a tax break on the money you contribute to your IRA while you’re still working, but you’ll pay taxes on that money when you withdraw it later.
One potential benefit of a traditional IRA is that, if you expect to be in a lower tax bracket in retirement than you are now, you could pay less in taxes on your IRA withdrawals than you would have paid on the income when it was earned. Additionally, if you’re looking for a way to lower your taxable income for the current year, contributing to a traditional IRA can help you do that.
To summarize, a traditional IRA offers:
– Tax-deductible contributions
– Taxes owed on withdrawals
– Potential tax savings in retirement
Roth IRA
Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible. However, qualified withdrawals made in retirement are tax-free, which can be a huge advantage for retirement planning.
Another potential benefit of a Roth IRA is that, because you’ve already paid taxes on the money you contribute, you can withdraw your contributions at any time without incurring taxes or penalties. This means that a Roth IRA can also be a useful tool for short-term savings goals, while still providing long-term tax-free growth potential.
To summarize, a Roth IRA offers:
– Non-tax-deductible contributions
– Tax-free withdrawals in retirement
– Flexibility to withdraw contributions penalty-free
Which one is right for you?
The decision of whether to invest in a traditional or Roth IRA will depend on a variety of factors, including your current tax bracket, your expected tax bracket in retirement, and your investment goals.
If you’re in a higher tax bracket now, a traditional IRA’s tax-deductible contributions could be an attractive option. However, if you think you’ll be in a higher tax bracket in retirement, a Roth IRA’s tax-free withdrawals could be a more advantageous choice.
Ultimately, the point of an IRA is to save money for retirement, so it’s important to look at your individual situation and choose the investment that is most likely to help you reach that goal.
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