Traditional IRAs and Roth IRAs: Which Is The Best Fit For You?

There are many factors to consider when deciding whether to open a Roth IRA or a Traditional IRA. Both forms of IRA (Individual Retirement Account) are excellent ways to save for retirement and both offer different advantages. Let's take a look at the profile of each type of IRA.

A Traditional IRA has the following features:
-tax deductible contributions (depending on income level)
-withdrawals can be made at age 59 1/2 and are mandatory by age 70 1/2
-taxes are paid on earnings when withdrawn from the IRA
-funds can be used to purchase a variety of investments (stocks, bonds, CDs)
-no income restrictions
-all funds withdrawn before 59 1/2 are subject to a 10% penalty (subject to exeption)

Roth IRA
-contributions are not tax deductible
-no mandatory distribution age
-all earnings and principal are 100% tax free
-funds can be used to purchase a variety of investments (stocks, bonds, CDs)
-principal contributions can be withdrawn at any time without penalty

The primary advantages of investing in a Traditional IRA is that the tax savings at retirement may be able to decrease your taxable income to a lower tax bracket. You may also be able to use a Traditional IRA to lower your tax bracket during your working years (depending on your income), and then begin withdrawals during retirement in a lower tax bracket. Another huge advantage for younger clients is that you are allowed to make withdrawals from your IRA in order to help pay for a first-time home purchase (you must own the IRA for a minimum of 5 years to qualify for this exemption).

The main disadvantage of a Traditional IRA is that withdrawals known as Required Minimum Distributions (or RMDs) are mandated by law at age 70 1/2. So, whether you need the money or not, you are required to begin these withdrawals.

In a Roth IRA, withdrawals made while you are in retirement are tax free - this is true for withdrawals made on both principal and earnings. Withdrawals from these accounts are also at your discretion; RMDs are not required. However, Roth IRAs are subject to qualification based on income - if you file taxes as a single person, you may not make more than $95,000 and a married couple cannot have a combined income of more than $150,000. Annual contributions are also limited to $5,000.

Depending on your particular situation, a Traditional IRA or a Roth IRA may be right for you. If you're looking for a tax deferred vehicle, a Traditional IRA may be right for you; if you're interested in making tax free withdrawals in retirement then a Roth IRA is a better fit. These types of plans can be established within safe money vehicles which can guarantee upside potential, provide you with safety from the risk of market downturn and a provide you with a guaranteed lifetime stream of income. If you're eligible for both types of IRAs, you can set up both accounts for tax diversification purposes - allowing you to benefit from tax benefits now and in retirement.

Remember - investing in your retirement is investing in your future! Be confident in your future!

If you have any questions or know anyone who would like to establish a Traditional IRA or a Roth IRA, please don't hesitate to contact us for a free consultation.

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If you have any questions or know anyone who might need any of the types of services described within, please do not hesitate to contact us for a free consultation.

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