There’s no question about it – preparing for retirement is a huge task. If you’re like most people, an Individual Retirement Account (IRA) is likely to play a central role in your retirement saving strategy. There are several different types of IRAs available. Two of the most popular are the Roth and the traditional. Not sure which is right for you? Check out some of the differences below.
Understanding the Differences Between the Traditional and Roth IRA
Designed to be a convenient way to save for retirement, Individual Retirement Accounts offer tax advantages to help you save for retirement. While both offer tax advantages, they do so in different ways.
A traditional IRA may allow deductions on the contributions you make while working. Also, taxes on your growth are deferred as long as the funds are in the IRA. Once you take a withdrawal, the distribution is taxed as income.
Traditional IRAs can be particularly beneficial to people whose income is too high to meet the eligibility requirements of the Roth IRA. Additionally, they can also be a better choice for someone who will benefit from taking the tax deduction while still working and those who expect to have significantly lower income during their retirement years.
A Roth features no actual tax deductions while you are actively contributing to the account, but results in tax- and penalty-free distributions after retirement, as long as the distributions are taken after age 59 ½. A Roth IRA is better suited for those who will have an equal or higher retirement income, as compared to their pre-retirement years. It also allows for withdrawals without taxation, once you retire and makes it possible to avoid the required minimum distributions that would otherwise begin at the age of 70 1/2.
Important Facts for Those Nearing Retirement Age
If you are ramping up your retirement savings or getting a late start and trying to save more, there are a number of things you should know that can be helpful as you near retirement age.
- You can choose to contribute to both Traditional and Roth IRAs at the same time, as long as all conditions are met, including contribution limits.
- A catch-up contribution caveat exists that may allow you to increase your contribution amounts after the age of 50, as long as all applicable conditions are met.
- You can choose to open and contribute to Roth and Traditional IRAs even if you are also participating in an employer-sponsored retirement plan.
- You should consider any IRAs to be an important part of your estate and ensure that you understand how the beneficiary designation will apply and how it will affect your estate, in case of your death.
Planning for your retirement is critical to ensuring that your financial needs will be met after retirement. It is important that you take time to carefully consider all your choices before creating a specific plan. Your financial advisor can help you decide which type of IRA best fits into your retirement savings strategy.