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Roth vs Traditional IRA: What’s the Difference?

It is never too early to start planning for your future retirement. To make sure you have enough funds to enjoy the later part of your life, the estate planning experts at Phelps LaClair suggest that our clients consider investment retirement accounts (IRAs). 

There are two main types of IRA accounts—traditional and Roth. This can sometimes cause confusion, as each type has its pros and cons. Let’s take a deeper dive into Roth vs traditional IRAs and what they each have to offer. 

What is a traditional IRA?

Established in 1974, a traditional IRA allows a person to save income before it gets taxed by the government. A person does not pay any taxes on money saved in a traditional IRA until they make a withdrawal. Funds can be withdrawn starting at age 59.5. 

Once you reach the age of 72, you must make the required minimum distributions (RMDs) to your account. And, depending on your tax status, you may be able to partially or fully deduct the contributions you make to your traditional IRA when filing your taxes. 

What is a Roth IRA?

Delaware Senator William V. Roth, Jr., introduced legislation forming the Roth IRA in 1997. The government taxes money placed into a Roth IRA upfront. This means that withdrawals are tax-free. Funds can remain in a Roth IRA forever—there are no required minimum distributions to take. 

Additionally, Roth IRA funds can be withdrawn at any time, for any reason—you do not have to wait until a certain age to make a withdrawal. However, taxes may be applied to any interest from funds that you withdraw. And, if it’s been less than five years since you started contributing to your Roth IRA, you might face a withdrawal penalty. 

Roth vs traditional IRA—which is better for me?

Both traditional and Roth IRAs are solid choices when saving for retirement. However, there are enough differences between them to make one option better than the other, depending on your lifestyle and financial situation. 

Regardless of which IRA you choose, it’s important to note both have the same annual contribution amount. In 2022, a person under the age of 50 can contribute up to $6,000 per year. The amount increases to $7,000 per year for those ages 50 and older. 

Here are a few questions that will help you figure out which type of IRA will work best for you. 

1: Are You Filing Married or Single?

While anyone at any income level can participate in a traditional IRA, there are income limits to a Roth IRA. A person filing their income taxes as single can only contribute to a Roth IRA if they earn less than $140,000 in 2021 and $144,000 in 2022. And a married couple filing jointly may participate in a Roth IRA if their combined income is less than $208,000 in 2021 and $214,000 in 2022.

2: Will You Need to Withdraw Funds Early?

As we outlined earlier, you cannot touch traditional IRA funds until age 59.5 without penalties. However, if you think you may need access to that money earlier, a Roth IRA will make more sense for you. 

3: Will Your Future Tax Bracket Change?

When deciding between a Roth vs traditional IRA, you’ll need to consider the tax bracket you expect to be in at retirement. If you believe you will be in a higher tax bracket, a Roth IRA allows you to pay taxes now so that withdrawals are tax-free later on. However, if you believe you will be at a lower tax bracket after retirement, a traditional IRA might be your best option, as the taxes you pay on withdrawn funds will be lower than the taxes you would pay on deposit. 

Planning for Retirement in Phoenix, Arizona

Both traditional and Roth IRAs offer excellent options for saving money to enjoy during your sunset years. They offer a chance for people who have not yet started saving for retirement to catch up. Whether you choose a Roth or traditional IRA, you will be setting yourself up for economic stability later in life. 

If you have more questions on Roth vs traditional IRAs and how they play a part in the estate planning process, call Phelps LaClair today at 480-892-2488.

Photo by Kampus Production on Pexels

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