TRADITIONAL IRA VS. ROTH IRA

March 3, 2022

There are multiple individual retirement account options an individual can choose. The main choices are a Traditional IRA and Roth IRA. These options have many similarities and differences, and it is up to the individual to decide which option is best for their retirement goals.

Traditional IRAs allow individuals to direct pretax income toward investments. These investments will grow tax deferred. This option allows you to deduct the contributions from your taxes. However, these tax deductions may be limited if you or your spouse are covered by a work retirement plan. Individuals under 50 can contribute up to $6,000 each year. Individuals over the age of 50 can contribute an additional $1,000, known as the catch-up provision. People can contribute to their traditional IRAs until age 70 ½, and can begin withdrawing funds, without a penalty, beginning at age 59 ½. There is a 10% withdrawal penalty if funds are withdrawn before age 59 ½. At age 72 the owner of the account must begin taking a required minimum distribution, which is a percentage of the account total.

A Roth IRA is another individual retirement account that has advantages and disadvantages like the Traditional IRA. To be able to fully contribute to a Roth IRA as a single filer, the individual must make less than $144,000 per year. If married and filing jointly, the couple must make a combined less than $214,000 per year. The contributions must be after-tax dollars. This money then grows tax-free. Like a Traditional IRA, under the age of 50, an individual can contribute up to $6,000 per year. Age 50 and above, an individual can contribute another $1,000 as their catch-up contribution. Unlike a Traditional IRA, a Roth IRA allows you to contribute beyond age 70 ½ if you have earned income. A Roth IRA also has no required minimum distribution. There is still a 10% penalty for withdrawing funds from a Roth IRA before age 59 ½. But there is only a penalty if you withdraw gains. There is no penalty for withdrawing the principal before age 59 ½.

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