Understanding the differences between Individual Retirement Accounts
Currently, there are two popular Individual Retirement Accounts (IRAs) that you might consider: the traditional IRA and the Roth IRA. While both are long-term savings vehicles with tax benefits, each has different rules concerning contributions, age, and income that may change from one year to the next.
Perhaps the biggest difference between traditional IRAs and Roth IRAs is how and when taxes apply to the contributions and earnings. Contributions to traditional IRAs can be pre-tax (deductible on the taxpayer’s income tax return). Although contributions and earnings accumulate on a tax-deferred basis, income taxes are due when IRA distributions are taken.
On the other hand, contributions to Roth IRAs are made with after-tax dollars, and contributions and earnings accumulate tax free. No income tax is due when distributions are taken from a Roth IRA. For tax year 2021, the maximum contribution to either a traditional IRA or Roth IRA is $6,000 ($7,000 for individuals age 50 or older).
As you investigate which IRA – or combination of IRAs – offers you the best bottom line, you may want to consider the differences, as the simple IRA checklist highlights.
A Simple IRA Checklist
It is important to note that withdrawals after age 59½ may be taxable if the Roth IRA has not existed for at least five years and penalty-free withdrawals can be taken in certain situations, but additional rules apply. Further, contributions to a traditional IRA are tax deductible up to certain limits.
Your Financial Advisor
An analysis of your personal financial situation and retirement objectives with a qualified financial professional can help you develop a financial strategy to meet your specific needs. Scrutinizing the details now may save you time and money in the future.