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What’s the difference between a Traditional IRA and a Roth IRA?

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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

Individual Retirement Accounts (IRAs) offer a tax-advantaged way for Americans to save for retirement. There are two main types of IRAs: Roth IRA and Traditional IRA. Although many people may find the terms confusing, understanding the differences between these two types of IRAs is essential in choosing the one that best suits their retirement goals.

Roth IRA

A Roth IRA is a type of retirement account where contributions are made with after-tax dollars. This means that contributions made to a Roth IRA will not be tax-deductible, but the money grows tax-free until withdrawal. This allows for tax-free withdrawals in retirement, which can be a substantial benefit.

Additionally, there are no required minimum distributions (RMDs) for Roth IRAs. This means that account holders can keep their money in the account as long as they wish, without being required to start withdrawing at a specific age.

Another advantage of Roth IRAs is that they offer greater flexibility for withdrawals than Traditional IRAs. Contributions can be withdrawn at any time tax-free, and depending on certain conditions, earnings may also be withdrawn tax-free.

The disadvantages of Roth IRAs include eligibility limits based on income level. Only individuals with adjusted gross incomes of less than $140,000 in 2021 are eligible to make the maximum contributions, and those with incomes between $140,000 and $160,000 are eligible for a reduced contribution limit. Married couples filing jointly with an adjusted gross income of less than $208,000 in 2021 can also contribute the maximum, while those with incomes between $208,000 and $218,000 can contribute a reduced amount.

Traditional IRA

A Traditional IRA is a type of retirement account where contributions are made with pre-tax dollars. This means that contributions made to a Traditional IRA will be tax-deductible, but the money grows tax-deferred until withdrawal. This also means that withdrawals in retirement will be taxed as ordinary income.

Unlike Roth IRAs, Traditional IRAs have required minimum distributions (RMDs) that must begin by age 72. This means that account holders are required to withdraw a specific amount from their account each year, and face penalties if they fail to do so.

The disadvantages of Traditional IRAs include the tax burden on withdrawals and the lack of flexibility in withdrawals. Withdrawals before age 59 ½ may be subject to a 10% early withdrawal penalty, in addition to income tax.

The Verdict

In summary, Roth IRAs are best for those who expect to be in a higher tax bracket in retirement, seeking tax-free withdrawals, and greater flexibility with withdrawals. Traditional IRAs are best for those who expect to be in a lower tax bracket in retirement, seeking tax-deductible contributions, and are comfortable with minimum required distributions.

It’s important to note that both types of IRAs offer tax advantages for retirement savings, and the decision on which one to use will depend on individual financial circumstances, retirement goals, and preferences. Consult a financial advisor to help determine which IRA type is best for you.