Roth IRAs Vs. Traditional IRAs: The Difference Lies in The Taxes
This pandemic has taught us that no matter where we are in our life, it can catch us off guard. As such, planning for the future today must be a priority.
Your investment goals and objectives determine whether an Individual Retirement Account (IRA)is a better option for you.
IRAs are tax-advantaged vehicles designed for long-term savings and investment.
There are two main types of investments your IRA can hold based on your preferences. First, the traditional IRA, introduced in 1974, and second Roth IRA, established in 1997.
Let’s look at some fundamental differences between the two:
Roth IRA becomes penalty and tax-free after five years and 59 ½ years of age; it has no mandatory distribution age.
While the penalty is also free with the traditional IRA, it’s taxed as current income after 59 ½ years of age and has a mandatory distribution age, i.e., 72 years.
There’s no age restriction in both the IRAs, but there’s a difference in contribution eligibility and amount.
With Roth IRA, single tax filers with AGIs of less than $140,000 are eligible for single people, whereas married couples filing jointly with AGIs of less than $208,000 are eligible.
In contrast, everyone with earned income can contribute to the traditional IRA, although tax deductibility is based on income limits and an employer plan’s participation.
One of the key benefits of a Roth IRA includes tax-free growth and withdrawals during retirement. Whereas with traditional IRA’s, tax is deducted on both federal and state levels.
This means that withdrawals in a traditional IRA are generally lower and decrease your overall savings, as they’re taxed on your income tax rate.
However, this lowers your AGI, which makes you eligible for receiving other tax incentives that you wouldn’t have gotten otherwise.
Investing in an IRA is beneficial for all, no matter which option you think is better for you.
The choice depends on your income, age, and when you expect to be in a lower tax bracket—currently or during retirement.
But being able to make wise financial choices that will provide security and reap maximum benefits is essential.
You can also get a self-directed account, which gives you much more control. Contact us for more information.