traditional ira vs. roth ira
TRANSCRIPT
T RA D I T I O N A L V S . R O T H I RAW H I C H I S B E TT E R F O R TA X E S ?
B AC K G R O U N D
• While Traditional IRAs and Roth IRAs have many similarities, choosing one over the other without doing the proper research can end up being a costly decision.
• Each option offers advantages that can differ based on your investment choices, personal financial situation and long-term goals.
T RA D I T I O N A L I RA
• The money contributed to a Traditional IRA is pre tax; tax deduction in contribution year.
• Contributions to traditional IRAs lower your taxable income in the contribution year. This lowers your adjusted gross income.
• Up to $10,000 can be withdrawn without the normal 10% early-withdrawl penalty to pay for qualified first-time homebuyer expenses (you will pay taxes on the distribution).
• Anyone with earned income, who is younger than 70 1/2, can contribute to a traditional IRA.
R O T H I RA
• No tax break for contributions; tax free earnings
• You are taxed when you withdrawn your money
• Contributions to Roth IRAs can be withdrawn penalty and tax free any time, even before age 591/2.
• Five tax years after the first contribution, you can withdraw up to $10,000 of Roth earnings penalty free to pay for qualified first time homebuyer expenses
• Roth IRAs have income-eligibility restrictions.
TA X I N C E N T I V E S
• Traditional IRA: You avoid taxes when you put the money in. Contributions are tax deductible on both state and federal tax returns for the year you make the contributions, while withdrawals in retirement are taxed at ordinary income tax rates.
• Roth IRA: You avoid paying taxes when you take the money out in retirement. They provide no tax break for contributions, but earns and withdrawals are generally tax-free.
F U T U R E TA X RAT E S
• Deciding between a traditional and Roth IRA should depend on whether you expect your income tax rate in retirement to be higher or lower than what you currently pay.
• If you think that you will be in a higher tax bracket when you will be taking money from your IRA then you will most likely want to avoid paying taxes at that time. Therefore, a Roth IRA may provide more tax incentive.
W I T H D RAWA L R U L E S
• Traditional IRAs require you to start taking required minimum distributions at age 70 1/2.
• Roth IRAs do not mandate withdrawals during the owner’s lifetime. So if you don’t need the money, Roth IRAs can continue to grow tax-free throughout your lifetime. This makes them the ideal wealth-transfer vehicles.
T H E BO TT O M L I N E
• Investing in a Roth IRA is likely to have more long-term advantages.
• However, your personal financial situation and long-term investment strategy and goals should play the biggest role in your decision.
• Remember, it is possible to split your money between a Traditional IRA and a Roth IRA.