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Betsy Wise
By: betsy_wise
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Roth IRA vs Traditional IRA: Which One to Choose?

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Extra choices are good especially when you have more than one option to save retirement income. After you decide between a Roth IRA vs Traditional IRA, your next decision is to invest your money in savings products that continually earn money.

Because there are differences in tax benefits for Roth and traditional IRAs, it’s important to look at their differences and similarities. After reading this post, you should be able to choose between a Roth IRA vs Traditional IRA and select the one best suited for you, your business, and your future.

What are IRAs?

IRAs or Individual Retirement Accounts are designated as tax-free or tax-deferred. As your retirement nears or even if it doesn’t, you can make adjustments along the way to increase earnings. Income can increase or decrease or you can change your goals. 

IRAs help you create sufficient income to cover retirement costs. When considering a Roth IRA vs traditional IRA, you can select from a variety of investments such as mutual funds, exchange-traded funds, and popular investments like stocks and bonds.

Whether you select a Roth IRA vs Traditional IRA, keep in mind that AARP predicts retirees will need 10 to 12 times in their savings accounts compared to current annual incomes. Moreover, most people use 70 to 80% of their pre-retirement income after they stop working. 

Of course, your needs vary depending on your lifestyle, where you live, and your health status. Needless to say, not having a savings plan isn’t an option. People are living longer so their savings need to last through their retirement years. 

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Roth IRA

In simple terms, a Roth IRA helps you put away money without paying taxes later. That way, when you retire and use the money according to Roth IRA guidelines, there are no taxes due. 

To keep from paying taxes on earnings from investments, you can’t withdraw money before age 59 ½ and must have owned the retirement account for at least 5 years. 

Because you can contribute at any age, anyone who earns income or is already retired can contribute to a Roth IRA. 

Traditional IRA

This type of IRA helps you think ahead to the future and save money on taxes. 

When you contribute, you can deduct its value and thereby pay less federal and state taxes. Adjusting your gross taxable income puts you in a position to qualify for other tax incentives like earned income credit or a child tax credit. 

Later, when you make withdrawals during your retirement years, there’s a good chance you will be earning less income and may qualify for a lower tax bracket. That means you could owe less tax on traditional IRA withdrawals.

#CaminoTip
As your business or personal goals change, you may consider getting both types of IRAs to serve as a dependable financial safety cushion.

Roth IRA vs Traditional IRA: Which is better?

Take time to look closely at how the two IRAs differ to determine which one seems the better match for your financial future. 

When deciding between a Roth IRA vs Traditional IRA, consider whether your tax rate will be higher or lower when you retire. 

Is it more important to get tax breaks now when you’re still working? 

Will you need to withdraw income before age 59 ½? If so, are you prepared to pay penalties and any associated taxes? 

Do you want to continue making contributions to your preferred IRA after you retire and are you okay with making required minimum distributions at age 70 ½?

Roth IRA Traditional IRA
No tax breaks on federal and state tax returns. Contributions are tax-deductible on federal and state tax returns the year when you put money into an IRA account. Traditional IRAs lower your adjustable gross income which may help you qualify for other tax incentives.
Contribution limits: $6,000 or $7,000 age 50 or older. Income limits determine how much you can contribute. 

If your income is outside limitations, you cannot contribute.

Contribution limits: $6,000 or $7,000 age 50 or older. 

Your income doesn’t affect how much you can contribute.

When making withdrawals, earnings are tax-free (no income tax due) when withdrawn at 59 ½ years old and you’ve owned the account for 5 years. 

However, taxes and/or penalties or both are imposed when you’re under age 59 ½ or have owned the account for less than 5 years. 

You can withdraw money at age 59 ½ without paying a 10% penalty.
No age limit for contributions. You can contribute up to age 70 ½.
Minimum distributions aren’t required. After age 70 ½, you are required to make minimum distributions.
Beneficiaries can extend distributions over a period of years. Beneficiaries pay taxes when they inherit the IRA.
Your current tax bracket is used to figure taxes you owe. Your future tax bracket is used to figure taxes you owe.

Roth IRA vs Traditional IRA: Similarities and Differences

Here’s what’s the same and different about these two types of IRAs.

Roth IRA vs Traditional IRA: Venn diagram, similarities and differences

Roth IRA vs Traditional IRA: Choose the type of IRA that’s better for you

You know your business and financial situation better than anyone. One type of IRA probably already seems more attractive over the other. 

Would you rather pay taxes now on a Roth IRA or wait until later when you retire and possibly pay less tax on withdrawn traditional IRA funds? 

As you’ve seen above when comparing a Roth IRA vs Traditional IRA, each type of IRA has distinct advantages and disadvantages. 

You can continue to learn about IRAs with this post: 

Attractive mature asian man with white stylish short beard looking at laptop computer with teenage eye glasses hipster woman in cafe. Teaching internet online or wifi technology in older man concept. Concept: roth IRAPlan your retirement as a small business owner with a Roth IRA

 

 

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