What Is the Difference Between a Roth and a Traditional IRA?
No matter your age, we feel it is smart to consider your retirement strategy to support the best life possible in your golden years. The small decisions you make right now will have an undeniable impact on your future.
Strategic retirement planning may need to be more than setting aside cash in a savings account. We feel It is important to make sure that your money is working for you. At the same time, the accumulation of wealth can also impact your tax burden, which is why you may want to talk to an accountant about tax planning options.
What Are IRAs?
Individual Retirement Accounts (IRAs) are financial tools that offer benefits for long-term investments and savings. The purpose is to provide a financial foundation to pay for your lifestyle after you retire.
Some employees access IRAs through their employers, such as a Simplified Employee Pension Plan (SEP). Another option is to choose an IRA to use on your own. Two of the most common types are traditional IRAs and Roth IRAs.
Comparison: Traditional IRA vs. Roth IRA
These two types of IRAs are similar in some ways. The key difference is in the way taxation is handled. Do you prefer to pay the taxes upfront or when the money is withdrawn from the retirement account? Additionally, there are nuances for eligibility and fund accessibility that need to be considered.
- Traditional IRA: With a traditional IRA, your contributions are tax-deductible, which means that you do not pay upfront income tax when the money goes into the account. Instead, you must pay tax on the withdrawals, based on your current tax rate at the time of distribution (usually in retirement). Early withdrawal (before the age of 59 1/2) results in a penalty of an additional 10% on top of the regular taxes.
- Roth IRA: Contributions to this type of IRA account happen after your income has been taxed. Since you are paying the taxes upfront, there is no tax obligation when you withdraw the funds during retirement. However, this type of account has eligibility restrictions (income limits).
There are tax breaks available for both types of IRA accounts. However, the most notable difference lies in when you choose to pay taxes on the money.
Choosing the Right Type of IRA
Is an IRA right for you? Our professional team at Bulman Wealth Group is here to answer your questions about IRAs and other types of retirement accounts, as well as comprehensive financial planning. Schedule a consultation to discuss available services.
