Amiti Advising founder, Tony Aguilar, discusses the difference between a traditional IRA and a Roth IRA and what is better for young professionals and college students….(read more)

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When it comes to saving for retirement, there are several options available, including traditional Individual Retirement Accounts (IRAs) and Roth IRAs. While they share similarities in terms of eligibility and contribution limits, there are significant differences between these two types of accounts that can have a major impact on retirement income.

The primary difference between a traditional IRA and a Roth IRA is the timing of the tax benefits. Traditional IRAs offer a tax deduction on contributions made, whereas Roth IRAs offer tax-free withdrawals in retirement. With a traditional IRA, contributions are made with pre-tax dollars, which lowers your taxable income for the year. This means you get an immediate tax deduction on contributions, which can help reduce your current tax bill.

On the other hand, Roth IRAs do not offer immediate tax savings, because contributions are made with after-tax dollars. However, the advantage of a Roth IRA is that you can withdraw your money tax-free in retirement. This means all the contributions and investment earnings in your Roth IRA grow tax-free, and you won’t have to pay taxes on withdrawals in retirement.

Another key difference between the two is the required minimum distributions (RMDs) – which is the amount you must withdraw from your account each year starting at age 72. Traditional IRAs require you to take RMDs, which are subject to income taxes. In contrast, Roth IRAs do not have annual RMDs. This means that you don’t have to withdraw any money at any age, and can leave the account to grow for as long as you want.

It’s also worth noting that Roth IRAs impose income limits for eligibility, whereas traditional IRA contributions are tax deductible regardless of income. However, if you make over a certain amount, you may not be able to deduct your contributions to a traditional IRA. Additionally, Roth IRAs are generally considered more flexible than traditional IRAs, as you can withdraw your original contributions at any time without paying taxes or penalties.

In summary, traditional IRAs offer upfront tax deductions but require annual RMDs, whereas Roth IRAs have no immediate tax benefits but permit tax-free withdrawals in retirement and have no RMDs. Which option is right for you will depend on your particular tax situation and investment needs. However, the most important factor is to start saving for retirement as early as possible so that you can maximize your potential gains and ensure a comfortable retirement.