There’s no denying that saving for retirement can be a confusing and daunting process. And things can get even trickier when it comes time to select a retirement account. If you’re confused about IRAs, you’re certainly not alone.
Many people don’t understand the differences between a traditional IRA and a Roth IRA, but the one you end up choosing for carrying out your retirement planning can have a major impact on your long-term savings. As such, it’s a good idea to gather a basic understanding of how these two IRA options differ and how to determine which option is best for your unique needs.
How Are They Different?
There are many aspects in which traditional IRAs and Roth IRAs differ. To summarize, the main differences between the two are seen in:
tax incentives and rates
Specifically, a person with any earned income can contribute to a traditional IRA (provided they’re under the age of 70.5), whereas Roth IRA contributors must make less than $129,000 (single) or $191,000 (married) in adjusted gross income per year.
Furthermore, with a traditional IRA, contributors get to enjoy both Federal and state tax deductions for contributions made during that tax year, but the money is taxed when it’s withdrawn. With a Roth IRA, on the other hand, the contributions are taxable when they’re put into the account, but not when they’re taken out.
Finally, these two types of IRAs differ greatly in that a traditional IRA requires you to begin taking money out once you hit age 70.5. With a Roth IRA, however, you can take out the money when you want or choose to leave it in the account (tax-free) for as long as you want.
Which Option is Best For You?
Now that you have a better understanding of the differences between a traditional and Roth IRA, you’re in a better place to start considering which option is best for you.
Start by considering your annual adjusted gross income; if it’s more than the income limits listed above, then the decision is simple: you’ll have to go with a traditional IRA. If you are eligible for both a Roth and traditional IRA, it can be helpful to consider how much flexibility you want with your money, along with what tax bracket you anticipate being in later on in your life. First Coast Wealth Advisors can help you make a well-informed decision regarding which IRAs and other retirement planning tools are best used to meet your retirement goals. Give us a call today to learn more.