You know you need to invest for retirement…but traditional IRA? Roth IRA? What’s the difference and which one is better?

The answer is that it truly depends on you and your particular situation. I’ll explain some of the differences and things to consider. Ultimately, the key is to pick one and then invest early and often!

**Disclaimer: I am not a tax professional and this is not investment or retirement advice. It is purely informational. Please do your own research and consult a professional as needed….(read more)

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REVEALED: Best Gold Backed IRA

Individual Retirement Accounts (IRAs) are a popular way to save for retirement. They offer tax advantages when contributions are made, and when money is withdrawn. There are two types of IRA: Traditional and Roth. Each has its own benefits and drawbacks, so it’s important to consider your individual circumstances when choosing the right one for you.

To start, let’s talk about Traditional IRAs. Contributions to a Traditional IRA are tax-deductible, and you only have to pay taxes on the money when you withdraw it. This is beneficial because it can lower your taxable income during your working years. However, once you turn 72, you’ll be required to start taking Required Minimum Distributions (RMDs) from your Traditional IRA, which can increase your tax liability.

On the other hand, Roth IRAs are funded with after-tax dollars, which means contributions aren’t tax-deductible. However, when you withdraw money from a Roth IRA in retirement, it’s tax-free. Additionally, there are no required minimum distributions, so you can continue to let your money grow tax-free for as long as you like. If you anticipate being in a higher tax bracket in retirement, a Roth IRA may be a wise choice.

Another important factor to consider is eligibility. Traditional IRAs have no income limits, but the tax deduction amount may be limited if you or your spouse is covered by a retirement plan at work. Roth IRA contributions are limited to those with incomes below certain thresholds. If you’re a high earner, you may not be eligible for a Roth IRA.

It’s important to note that there are penalties for withdrawing money early from either type of IRA. Traditional IRAs assess a 10% penalty on withdrawals before age 59 1/2. Roth IRAs allow contributions to be withdrawn anytime without penalty, but earnings may be subject to the penalty if withdrawn early.

Finally, consider your overall retirement strategy. Are you planning to leave an inheritance? Roth IRAs can be passed on tax-free to beneficiaries, while Traditional IRAs will be taxed as income to those who inherit them.

In summary, both Roth and Traditional IRAs offer tax advantages, but they differ greatly in fund sourcing and required distributions. Consider your income, age and overall strategy when deciding which IRA is best for you. A financial advisor can help you navigate your IRA choices and tailor a retirement strategy that’s right for you.