Traditional IRA vs. Roth IRA – Understanding the Basic Differences

The two most important types of Individual Retirement Arrangement (“IRAs”) are Traditional IRAs and Roth IRAs. When you are deciding between a Traditional IRA and a Roth IRA, you will want to consider several material factors including, but not limited to, Taxes, Age, Income, Contribution Limits, Contribution Deadlines, Withdrawal Scenarios, and Required Distributions.  Let’s take a quick look at the differences between a Traditional IRA and a Roth IRA in these areas to help you determine which type of IRA may be best for you!

With a Traditional IRA, you make contributions from your income, but BEFORE it is taxed.  Taxes with a Traditional IRA are levied when you take money out of the account (upon distribution). You can only contribute to a Traditional IRA until you are 70 1/2 years old, and the maximum contributions are the same as the Roth IRA. With the Traditional IRA, distributions MUST occur when you turn 70 1/2, at least for a minimum amount. Most firms do not charge brokerage account fees for Traditional IRAs, but you may still be charged fees if your account requires any special handling or services.

With a Roth IRA, you make contributions with your income from which your job has already taken out taxes.  The benefit is that you get Tax-free growth, provided that the account has aged for at least five years AND you are at least 59 1/2 years old, are disabled, OR it’s for a qualified first time home purchase. Distributions from Roth IRAs are not taxed by the federal government and no penalties are assessed.  Most providers of Roth IRAs do not charge fees on these accounts. The most you can contribute to your Roth IRA is $5,000.00 per year, or $6,000.00 if you are over 50 years old. There is no minimum required distribution with a Roth IRA.

Making decisions about your retirement is a very serious and complicated matter. Each individual/family’s needs should be considered separately along with several important factors in order to make the appropriate choice for you and your loved ones.  After educating yourself and understanding the basics of Traditional IRAs vs. Roth IRAs, we recommend you consult your investment professionals for their expert opinions based upon your personal situation.

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