Looking for ways to save for retirement outside of your 401(k) or other employer-sponsored plan? You may want to consider an IRA. An IRA is a popular tool for saving for retirement in a tax-advantaged manner.
There are several different types of IRAs available, with two of the most popular being the traditional IRA and the Roth IRA. If you’ve never used an IRA before, you may be unfamiliar with how they work. You might also be unsure of which one is the right one for you. Each has its own benefits and considerations, so it’s important to weigh them carefully before making your selection.
Below are some of the key differences between the two:
Both the traditional IRA and the Roth IRA offer tax advantages for your retirement savings. However, they both do so in different ways. With a traditional IRA, you may get a tax deduction when you make a contribution to your account. Your contributions then grow tax-deferred as long as they stay in the IRA. They’re taxed as income when you take a distribution.
In the Roth IRA, you get no upfront deduction for contributions. However, your contributions grow tax-free while the money is in the account and if you take a withdrawal after age 59½, your withdrawals are also tax-free. Generally speaking, the traditional IRA provides much of its tax benefit today, while the Roth IRA provides the tax benefit in retirement. If you feel your tax rates may be higher in retirement, the Roth IRA may be the more appropriate choice.
In both the traditional IRA and the Roth IRA, there is a 10-percent penalty for withdrawals before age 59½. However, the way those penalties are implemented differ between the two accounts.
If you take an early withdrawal from a traditional IRA, the entire withdrawal is subject to the early penalty and taxes. If you take an early distribution from a Roth, only your growth is taxed and penalized. Your contributions can always be taken tax- and penalty-free.
Required minimum distributionsThe traditional IRA also has something called required minimum distributions, also known as RMDs. As the name suggests, these are distributions you are mandated to take from your account. They start at age 70½. They usually start as a small percentage and then increase each year as you get older.
The Roth IRA has no RMDs. That means you can let your Roth assets grow and accumulate as long as you like, especially if you don’t need the income in retirement.
Income limitationsIt’s possible you may feel the Roth IRA is best for you, but your only choice may be the traditional. That’s because the Roth IRA is subject to income limitations. If your income exceeds those thresholds, you’re ineligible for Roth participation.
In 2016, single individuals who make up to $117,000 annually can contribute to a Roth. If their income is between $117,000 and $132,000, they can make a partial contribution. If their income exceeds $132,000, they aren’t eligible for a Roth contribution.1
For married couples, the partial contribution limit begins at $184,000 in combined annual income. Once income exceeds $194,000, the couple is not eligible. If your income exceeds these limits, a traditional IRA may be your only choice.1
Still not sure which IRA is best for you? Contact us at Gregory Financial for more information. We welcome the opportunity to help you find the best IRA strategy for your needs. Let’s start the conversation today.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
15636 – 2016/4/29