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Traditional IRA vs. Roth IRA – Which Is Right For You?

14 Dec - Posted at 20:48h in Retirement Planning

No matter who you are, the retirement saving process can be confusing. It can be tricky understanding the differences in a Traditional IRA vs. Roth IRA- and knowing which one is best for you. At Appreciation Financial, we work to help teachers and other public employees plan for retirement, financially. The Traditional IRA and the Roth IRA are the two main types of IRA (Individual Retirement Accounts) and the main way they differ is the when and how your money is taxed. Depending on what kind of saver you are, a Roth IRA may be a better choice than a Traditional IRA.

How are the two types of IRAs similar?

  • No contribution age restrictions on Traditional or Roth IRAs
  • Maximum contribution for both is $6,000 per tax year ($7,000 if you are over age 50)
  • Both available for “saver's tax credit”

Choosing Between Two Different Types of IRAs

When deciding between these two options, you should ask yourself where you would rather see your tax breaks. With a Traditional IRA, contributions made towards the savings are tax-deductible, but withdrawals in retirement are taxable. If you choose a Roth IRA, you will have an investment that is not tax-deductible up front, but your withdrawals will not be taxed in retirement.

To decide between the two, ask yourself—do you think your tax rate will be higher or lower in the future? The answer to this question can be the key to your IRA decision.

Tax Breaks—Traditional IRA vs. Roth IRA

Both Traditional and Roth IRAs feature generous tax breaks, it is just a matter of deciding timing on when you claim those breaks. Let’s break down the timing factor in a Traditional IRA vs. Roth IRA.

A Traditional IRA allows you to make pre-tax contributions, and this type of IRA is best suited for an individual who expects to be in the same or lower tax bracket when they begin taking withdrawals.

A Roth IRA allows you to make after-tax contributions, making it best suited for those who expect to be in a higher tax bracket when they begin taking withdrawals.

Other Things to Consider—Traditional IRA vs. Roth IRA

  • With a Traditional IRA, anyone with earned income can contribute, but tax deductibility is based on income limits and participation in an employer plan.
  • 2021 Eligibility for Roth IRA is limited to single tax filers with MAGIs (Modified Adjusted Gross Income) of less than $140,000 (phase-out begins at $125,000); married couples filing jointly with MAGIs of less than $208,000 (phase-out begins at $198,000).
  • Distributions of Traditional IRA must begin at age 72, beneficiaries also subject to RMD (Required Minimum Distribution) rules.
  • Distribution of Roth IRA is not required for account owners. Beneficiaries subject to RMD rules.
  • The government allows workers to move money from a traditional IRA to a Roth IRA so long as they pay taxes on the transferred amount and meet the IRS requirements in order to contribute to a Roth account.

Our financial professionals are here to help you

Still not sure which of these two options—a Traditional IRA vs Roth IRA—is best for you? Want to make sure you are making the right decision? We can help you with that. After all, the average American spends around 20 years in retirement, and there's no time like the present to start planning! Contact Appreciation Financial today.

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