Roth IRA vs. Traditional IRA – Pros and Cons

The best time to start saving for retirement is always right now, no matter what age you are. With all of the different ways to save, it can be overwhelming to choose where to put your money. Individual retirement accounts (IRAs) are a common choice as they aren’t tied to your job and give you more freedom in your choices. You contribute money to the IRA over the years that you’ll later be able to take out for retirement funds. But there are two kinds to choose from, a traditional IRA and a Roth IRA, each with their own benefits. The biggest difference in the two comes from when you are taxed on the money in the account. Let’s take a look at what each one means and the pros and cons of both.

Traditional IRA

With a traditional IRA, your contributions are tax deductible on both federal and state tax returns. This means that each time you put money into the account, you lower your taxable income that year. If you put in $1,000 this year, your taxable income is $1,000 less than before. However, the taxes hit when you withdraw money from the account. You’ll be taxed at your current income bracket whenever money is withdrawn. Also, if you withdraw money before you turn 59 and a half years old, you’ll pay a 10% penalty on top of the tax rate.

Traditional IRA Pros

·       Contributions are tax deductible

·       Lowered adjusted gross income from contributions could make you eligible for other tax benefits

·       You get taxed less in total if your income bracket is lower when you retire than when you contribute to the IRA

Traditional IRA Cons

·       Withdrawals before age 59 and a half incur a 10% penalty

·       Withdrawals are taxed at your income bracket at the time of withdrawal

·       Required minimum distributions (RMDs) after age 72 – Whether you need the money or not, you are required to withdraw a certain amount each year once you turn 72 years old

Roth IRA

Taxation with a Roth IRA is the opposite of the traditional, you pay taxes on your contributions so that you don’t have any taxes on your withdrawals. There are income-eligibility restrictions on Roth IRAs. To contribute to a Roth IRA, a single person must an income lower than $144,000 per year, and couples must be below $214,000 per year. Roth IRAs don’t have RMDs, so you’re never required to withdraw money at any age. This makes them useful for transferring wealth to children or loved ones. Also, there is no age limit for withdrawals. You can withdraw up you’re your contribution level that year for any reason, at any age without a penalty.

Roth IRA Pros

·       Withdrawals are not taxed

·       No penalties for withdrawals at any age

·       No RMDs requiring you to withdraw money at any age

·       Great for transferring wealth, as withdrawals are not taxed

Roth IRA Cons

·       Contributions are taxed

·       Income-eligibility limit means that singles making more than $144,000 per year and couples making more than $214,000 per year can’t contribute to Roth IRAs.

Plan IV | Traditional IRAs, Roth IRAs & Financial Advice

Saving for retirement is a complicated and long process, and the importance of it can make it very stressful. You want to know that you’re doing the right thing, making the most of your money, and setting yourself up securely so you can retire when you want to. With the expert advice of the professionals at Plan IV, we can help you find the best saving strategies for your unique situation so that you don’t have to worry about retirement funds. We can help you choose between a traditional IRA or a Roth IRA, or both, depending on your goals and circumstances.

To learn more about IRAs and how we can help, give us a call at (248) 689-4910 or send in an online contact form now!