Trying to decide between a traditional IRA and a Roth IRA is an excellent position to be in. This means that you’re wise enough to consider the options available to you and that you have money to save for your retirement. It’s totally fine to have both retirement accounts, but because you could only contribute about $5,500 annually to either account, it’s ideal if you select between these two options.
Primary Differences between The Traditional IRA and Roth IRA
The most significant difference between the two is when and how you obtain the tax break. With a traditional IRA, your contributions are tax-deductible, which means that every cent you contribute lowers your income that’s taxable, provided that your income doesn’t exceed the limits set by the IRS, explains an experienced financial advisor specializing in retirement planning. Otherwise, you could opt for a non-deductible traditional IRA that’s still tax-deferred.
Generally speaking, this means that you won’t need to pay taxes on your contributions, whether your IRA is non-deductible or deductible. Your savings would grow without getting taxed until such time that you begin taking distributions or withdrawals. A traditional IRA comes with RMDs or Required Minimum Distributions that kicks in once you’re 70.5 years old. However, you’re not allowed to make contributions to a traditional IRA once you hit the age 0f 70.5 and you can’t just leave your savings untouched because of the RMD.
On the other hand, the funds in a Roth IRA is after-tax money, and you’re not allowed to deduct contributions. Since you pay taxes when you deposit money in a Roth IRA, you won’t need to pay taxes when you make withdrawals, regardless if you do it before or during retirement. A Roth IRA doesn’t have RMDs, meaning that you could withdraw from it as needed. You could even leave it in your will and continue making contributions to it regardless of your age. This could be a huge advantage if you want to keep working after 70 years old.
The Main Takeaway
Almost half of the entire American populace don’t have retirement accounts, so if you’re privileged enough to have the means of getting a traditional IRA or Roth IRA, count yourself lucky. When making your decision, take into account the tax considerations and any future plans you might have, such as estate planning. Don’t forget to factor in the associated fees since these could easily cut into your retirement savings over time if you’re not careful.