Traditional vs. Roth IRAs: What you need to know

Traditional vs. Roth IRAs: What you need to know

IRAs can be a great way to save for retirement and plan for tax savings. Traditional IRAs are available to everyone regardless of income, but Roth IRAs may offer additional flexibility if you are eligible.

Both types of accounts provide tax breaks and allow earnings to grow tax-free, but the traditional IRA and the Roth IRA each have their own benefits and disadvantages, depending on your financial situation. The biggest difference between the traditional and a Roth IRA is when the taxes will be paid—now or later.

With a traditional IRA, contributions are made pre-tax (typically with an up-front tax deduction). This means that you won’t have to pay income taxes on your earnings and contributions until you begin taking distributions, usually after you retire. You are required to begin taking distributions from a traditional IRA by April 1 following the year in which you turn 70½.

In contrast, a Roth IRA is funded with money for which you have already paid taxes, thus withdrawals of earnings are tax-free for qualified distributions. This type of account allows more access as you are able to withdraw contributions at any time without a penalty. Roth IRAs do have income-eligibility limits *, but unlike a traditional IRA there is no requirement to start taking distributions at a certain age.  So not only can you let it continue to grow after age 70½, you can also continue to contribute with earned compensation. A Roth can be a plus for those over age 70 who plan to continue working.

Additional withdrawal rules
You may withdraw money from a traditional IRA at any time, but in most cases there will be a 10 percent early withdrawal penalty if you take money out before age 59½.

If you withdraw earnings from a Roth IRA before age 59½, and before you’ve reached the five year holding period, that money will be subject both to income taxes and a 10 percent early withdrawal penalty.

There are some exceptions to the early withdrawal penalties above; generally, you may withdraw from either IRA penalty-free before age 59½ in order to buy your first home, pay for higher education or certain significant medical costs, or because of disability or death. These withdrawals would still be subject to taxes for the traditional IRA.

Dual IRAs
You may find it advantageous to have both a traditional and Roth IRA.  Having the flexibility to mix your withdrawals from both a traditional IRA (which will increase your taxable income) and from a pre-taxed Roth IRA may help you manage your overall tax liability.

If you would like more information on opening an IRA, contact us today at 888.616.5243.

 

*If your income is over the IRA income limits for a Roth IRA, you may be able to convert eligible assets such as a traditional IRA into a Roth. Contact us for additional information.

This information is not tax advice. Information is from sources deemed reliable. Information is subject to error, omission, withdrawal, or change. Contact your own tax advisor before taking any action that would have a tax consequence.