Traditional IRA vs Roth IRA
It is never too soon to start planning for retirement. The decisions you make today will have a lasting impact on your future. Investing in an Individual Retirement Account (IRA) allows you to save and invest for retirement on the side while being able to save on taxes. The two most popular IRAs are traditional IRA and Roth IRA, each coming with their own rules and benefits.
A traditional IRA allows you to make pre-tax contributions. In addition to this, your contributions may be tax deductible. This means you may get a tax break while contributing to the account, though you still have to pay taxes on the money you withdraw from the account during retirement.
A traditional IRA does not give you the opportunity to easily make withdrawals before retirement, as most early withdrawals made before the age of 59½ are subject to penalties and taxes. Though, there are exceptions when making withdrawals for major life events such as medical expenses or purchasing your first home under certain circumstances.
There are also limits associated with IRAs. For a traditional IRA, tax deductions for individuals covered by a retirement plan at work are phased out when your income is between $68,000 and $78,000 for single filers and between $109,000 and $129,000 for those who are married and filing jointly. The contributions are phased out completely when meeting and exceeding these limits.
A traditional IRA also requires you to begin taking minimum distributions once you reach the age of 72.
A traditional Roth IRA allows you to make after-tax contributions. In addition to this, your contributions are not tax deductible. This means you will not get a tax break while contributing to the account, though you won’t have to pay taxes on the money you later withdraw during retirement.
A Roth IRA also gives you the opportunity to withdraw your investment earnings before retirement. These withdrawals are subject to penalties and income taxes if you’re making a withdrawal before the age of 59½. A Roth IRA also gives you the opportunity to withdraw your contributions at any time, penalty-free.
Like traditional IRAs, Roth IRAs have their own income limits. Roth IRA contributions are phased out when your income is between $129,000 and $144,000 for single filers and between $204,000 and $214,00 for those who are married and filing jointly. The contributions are phased out completely when meeting and exceeding these limits.
A Roth IRA does not require minimum distributions at any point during the account owner’s lifetime.
So, which is better?
This entirely depends on your personal circumstances. A traditional IRA will give you a tax break early on before you retire, while a Roth IRA will give you a tax break in retirement. One of the biggest factors in choosing between the two comes down to whether or not you think you will be in a higher or lower tax bracket in retirement.
If you think you will be in a lower tax bracket during retirement, then a traditional IRA might be right for you.
If you think you will be in a higher tax bracket during retirement, then a Roth IRA might be best.
Bear in mind that there is more to it than simply gauging your tax bracket in retirement. Each IRA gives you different benefits outside of tax savings, like the aforementioned early withdrawals or income limits. To best navigate the intricacies and figure out which account works best for you, be sure to consult a professional.
No matter what, it is always best to begin saving early and often!