Roth vs Traditional IRA

Roth vs. Traditional IRA: Which One is Right for You?

When planning for retirement, choosing the right type of Individual Retirement Account (IRA) is a crucial decision. The two most common options are the Roth IRA and the Traditional IRA, each offering distinct tax advantages and considerations. Understanding the key differences can help you determine which one aligns best with your financial goals.

Tax Treatment: Pay Now or Later?

One of the biggest differences between a Roth IRA and a Traditional IRA is how they are taxed.

  • Roth IRA: Contributions are made with after-tax dollars, meaning you won’t get an immediate tax deduction. However, your withdrawals in retirement (including earnings) are completely tax-free if certain conditions are met.

  • Traditional IRA: Contributions may be tax-deductible, reducing your taxable income for the year you contribute. However, withdrawals in retirement are taxed as ordinary income.

Income Eligibility and Contribution Limits

Both IRAs have contribution limits set by the IRS, but income eligibility rules vary:

  • Roth IRA: Your ability to contribute is phased out at higher income levels. For 2024, single filers with a modified adjusted gross income (MAGI) above $153,000 and married couples filing jointly above $228,000 are not eligible to contribute directly.

  • Traditional IRA: There are no income limits for contributions, but deductibility may be reduced or eliminated if you or your spouse are covered by a workplace retirement plan and your income exceeds certain thresholds.

Withdrawal Rules and Required Minimum Distributions (RMDs)

  • Roth IRA: No required minimum distributions (RMDs) during the account holder’s lifetime, allowing tax-free growth for as long as you live. You can withdraw contributions at any time without penalty, but earnings must meet the five-year rule and be taken after age 59½ to avoid taxes and penalties.

  • Traditional IRA: Withdrawals before age 59½ may be subject to a 10% penalty unless an exception applies. RMDs begin at age 73, forcing you to withdraw a certain amount each year, which is taxed as income.

Best Fit for Different Scenarios

  • Choose a Roth IRA if: You expect to be in a higher tax bracket in retirement, want tax-free withdrawals, or prefer flexibility with no RMDs.

  • Choose a Traditional IRA if: You want an immediate tax deduction, expect to be in a lower tax bracket in retirement, or need to lower your current taxable income.

Need More Help?

Both Roth and Traditional IRAs offer valuable retirement savings opportunities, but the best choice depends on your current income, future tax outlook, and withdrawal preferences. Evaluating these factors can help you build a retirement strategy that maximizes your financial security.

Still unsure which IRA is right for you? Consulting a financial advisor can help tailor a plan to your specific needs. Financial Advisor Evan Valeri is available to Cornerstone members to help navigate these important choices.

 

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