If you’re thinking about saving for retirement, there are a lot of things to consider. There are many retirement accounts to choose from. Retirement accounts sponsored by the workplace aren’t the only way you can save money. You can also do it through individual retirement accounts, also known as IRAs.
This article will explain the two main types of IRAs: Traditional and Roth. Specifically, what they are, how they’re different from each other, and which of the two is the best option for you.
A Traditional IRA is a tax-deferred retirement account where you only pay taxes on your money when you withdraw it in retirement. By “tax deferring” we mean that all your interest, dividends, capital, etc., have limited or no upfront taxes applied to them. There are two types of Traditional IRAs: deductible and non-deductible. Your income plays a big role in deciding whether you qualify for a partial or full deduction on taxes.
A Roth IRA is a retirement account where you’ve already paid taxes on the money you are saving up. Additionally, during retirement you can make tax-free withdrawals if you meet certain criteria.
Differences Between Traditional IRA and Roth IRA
There is no age restriction in a Roth IRA. You can contribute money at any age. In a traditional IRA, you must be under 70 1/2 years of age to contribute money.
2. Tax Benefits
A Roth IRA offers a tax-free growth and tax-free withdrawals. In traditional IRAs, your contributions may be deducted. Your growth is also tax deferred.
3. Income Limit
Single people with incomes less than $131,000 and married people with incomes less than $193,000 per year are eligible for Roth IRAs. Anyone with an income can contribute to a traditional IRA. The tax deduction rate depends on what you earn.
4. Tax on Withdrawal
There is no tax on withdrawals in a Roth IRA. Any contributions or earnings are taxable when withdrawing from a traditional IRA.
5. Withdrawal Penalties
In a Roth IRA, non-qualified withdrawals have a 10 percent tax on them. In a Traditional IRA, any withdrawals before the age of 59 ½ are subjected to 10 percent taxation unless there is an exception.
6. Income Caps
In a Roth IRA, you may not be able to contribute due to income caps. Income caps cannot stop you from contributing to a traditional IRA.
7. Minimum Required Distributions
Roth IRAs do not require any minimum distribution during the life span of the owner. In Traditional IRAs, minimum required distributions start at 70 ½.
8. Deduction on Contribution
You cannot deduct your Roth IRA contribution. You can deduct some or all Traditional IRA contributions.
Similarities Between Traditional IRA and Roth IRA
1. Contribution Limits
In both traditional and Roth IRAs, if you are under 50 years of age, you can contribute up to $5,500, and if you are over 50, you can contribute up to $6,500.
2. Contribution Deadline
The deadline for both Roth and Traditional IRAs is typically April 15 of the following year.
IRAs have no initial or maintenance fee. There are also no transaction fees on IRAs.
4. Catch-up Contribution
Individuals above 50 can contribute an additional $1,000 per year.
5. Minors Contribution
Minors and spouses can both contribute to Traditional or Roth IRAs.
6. Money Withdrawal
You can withdraw money at any time from Roth and Traditional IRAs. Be mindful of tax penalties.
If you are eligible for both a Traditional IRA and Roth IRA, you can split your contributions between the two. However, your total contribution must not exceed the limit for that year. You can also choose to contribute the balance to your Roth IRA and the deductible amount to your Traditional IRA. You will want to consider all the extra fees and charges that may apply if you decide to split your IRAs.
Many people believe that a Roth IRA is a better choice for them as it offers bigger tax breaks and more flexibility for withdrawing funds.
While choosing, make sure to determine which one benefits you more. If it’s hard for you to choose between the two, you can always get both and enjoy the benefits. Make sure to consult with a professional before choosing an IRA. They can explain all the benefits and downfalls of Roth and Traditional IRAs to you in detail, based on your specific situation.
Open an IRA at First Alliance Credit Union
Traditional IRAs and Roth IRAs can both give you a huge advantage when saving for retirement, especially if you start early.
If you want to open an IRA, contact First Alliance Credit Union. You can open an IRA for as little as $10.00, and there is no annual maintenance fee or service charge.