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Traditional VS Roth IRA’s

Published October 2nd, 2020 by Elliot Glass Insurance

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It's never too early to begin saving for retirement. The good news is, even if you have a 401(k) or 403(b) plan at work, give your savings a boost by opening an Individual Retirement Account (IRA). An IRA combines the benefits of compound interest and tax savings and is available to anyone who earns a taxable income. Opening an IRA is relatively easy, figuring out which one is best for you is the question. The two types of IRA’s are traditional and Roth, below you will see how they differ.

Roth IRATraditional IRA
Income eligibilityMay contribute if modified adjusted gross income (MAGI) does not exceed income limitations. You must have U.S. earned income.No income limit restrictions on contributions. You must have U.S. earned income.
Age restrictionsNoneNone
Tax deductibilityContributions are never deductibleYou may be eligible to deduct all or a portion of your contributions. Deductibility depends on your income, filing status, whether you and/or your spouse are covered by a retirement plan at work, and whether you receive social security benefits.
Withdrawal of contributionsWithdraw anytime without taxes or penalties.Withdraw anytime, but deductible contributions are taxable and generally subject to penalties if withdrawn before age 59½.
Withdrawal of earningsTax and penalty-free if a qualified withdrawal. A qualified distribution is tax-free if taken at least 5 years after the year of your first Roth contribution and you've reached age 59½, become totally disabled, die, or meet the requirements for first-time home purchase.Taxable when withdrawn and generally subject to penalties if withdrawn before age 59½.
Required minimum distributions (RMDs)None during your lifetimeYou must begin taking RMDs annually starting with the year that you reach age 72 (70½ if you reach 70½ before January 1, 2020). In either situation, you can delay taking your first RMD until April 1 of the year after you reach RMD requirements. If you defer taking your first RMD until April 1, you will still be required to take another (your second) RMD before December 31.
Contribution limitsFor the 2020 and 2021 tax years:
  •  If you are under age 50, you can contribute a maximum of $6,000
  • If you are age 50 or older, you can contribute up to $7,000
Depending on your income, contribution limits may be lower.		For the 2020 and 2021 tax years:
  • If you are under age 50, you can contribute a maximum of $6,000
  • If you are age 50 or older, you can contribute up to $7,000
Depending on your income, contribution limits may be lower.

IRAs are ideal for people who do not have access to a retirement plan through their employer, which is approximately 67% of the workforce. If you max out your contribution with your employer this is another great option that gives you more flexibility and control over your investment.

So, the only question that remains is which one is better for you.

If you are in a higher tax bracket when you retire, a Roth IRA is the better choice. You'll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you're in a higher tax bracket proving that an IRA is a great way to save even more money for retirement.

Traditional IRAs are preferable for people who expect to be in a lower tax bracket when they retire, while Roth IRAs are best for those who are currently in a lower tax bracket. The latter is better for younger investors who are just starting out in their professions and want to retire with greater money (and a higher tax rate).

Roth IRAs are more forgiving when it comes to early withdrawals. If you take money out of a traditional IRA before turning 59 and a half, you'll be taxed at your current marginal rate and face a 10% early withdrawal penalty. If you take money out of your Roth IRA before you turn 59 and a half, it depends on whether you're taking money out of your contributions or your profits. Withdrawing contributions from a Roth IRA is tax- and penalty-free at any age. Withdrawing profits before the age of 59 and a half, on the other hand, is subject to a 10% early withdrawal penalty and may be liable to income taxes, much like a conventional IRA.

As I mentioned in the very beginning, it’s never too soon to start thinking about your retirement plan. You may think there is no way to avoid outliving your income, but that doesn’t have to be the case. Book your free appointment today to review your financial needs and go over all your options.

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