Roth vs. Traditional IRA: Picking the Right Retirement Ride
- Michael Mann
- Sep 28, 2024
- 2 min read
Updated: Sep 29, 2024
Both Roth and Traditional IRAs are excellent vehicles for saving for retirement, but they take different approaches to taxes. Understanding these differences can help you steer your savings towards the option that best fits your financial goals.
The Tax Time Tango:
Traditional IRA: Think of this as a "pay less now, pay later" option. Contributions you make to a Traditional IRA may be tax-deductible, lowering your current taxable income. However, when you withdraw the money in retirement, it will be taxed as ordinary income.
Roth IRA: This is a "pay now, grow tax-free" strategy. Contributions are made with after-tax dollars, so you won't get an immediate tax break. But the flip side? Qualified withdrawals in retirement are completely tax-free, including any earnings your contributions have generated!
Who Should Choose Which?
Traditional IRA: A good fit if you're in a higher tax bracket now and expect to be in a lower tax bracket in retirement. This could be the case if you anticipate a significant decrease in income after you retire.
Roth IRA: Ideal if you're in a lower tax bracket now and expect to be in a higher tax bracket in retirement. This might be the case for young earners who expect their income to grow significantly over their careers. The tax-free growth can be a huge advantage in the long run.
Additional Considerations:
Income limits: There are income limits for contributing to Roth IRAs. Traditional IRAs have no income limits for contributions, but deductions may be phased out depending on your income and filing status.
Required Minimum Distributions (RMDs): Traditional IRAs typically require you to start taking withdrawals by age 73. Roth IRAs have no RMDs while you're alive, so you can leave your money growing tax-free for your heirs.
The Bottom Line:
Both Roth and Traditional IRAs offer valuable ways to save for retirement. The best option for you depends on your current tax situation and your projections for future income and tax rates. Consider consulting with a financial advisor to determine which IRA best suits your retirement goals.
Disclaimer: Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may results in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in 10% IRS penalty tax. Limitations and restrictions may apply.
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