General Finance

Traditional vs Roth: Which IRA is Best for You?

Saving for retirement? If not, you should be. No one is going to save up for you. If you are creating a retirement plan, why not use one with some tax benefits?

Let’s start with a few facts. A traditional IRA allows you to use pre-taxed dollars to fund the retirement account and is taxed when you start to take contributions from it. On the other hand, the Roth IRA uses post-taxed dollars to fund the retirement account and the money is tax-free when contributions are taken from it in retirement.

These are great sources of income in your retirement years because of the tax benefits the IRS is giving you on those gains. This is especially great since you don’t have to pay for these gains until you start taking contributions.  In the Roth IRA, your money grows completely tax-free.

There are contribution limits. You can only contribute a total of $5,500 dollars between both your traditional and Roth IRA per year. Unless you are over 50 years old, in which case you can contribute $6,500 a year. If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation – as long as your spouse did. You can also contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work.

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What you need to know

The traditional IRA allows you to deduct the amount you contribute from your taxes. The money is usually taken from your check using pre-taxed dollars. The good thing about this is that you can put money into your traditional IRA no matter how much money you make. Your deduction may be limited if you or your spouse are covered by a retirement plan at work. Check the IRS Website for more details on this. It is also good if you are trying to bring your taxable income down to avoid a higher tax rate.

The Roth IRA does not allow you to deduct your contributions from your taxes as you are using post-taxed dollars. The great part about it, though, is that neither the gain nor distributions are taxed. Essentially, you get your money tax-free in retirement. Unlike the traditional IRA, the Roth does have income limitations. If you are single or married filing separately, you cannot make more than $120,000 per year to contribute to the full amount. If you are filing jointly, your household cannot make more than $189,000 to make full contributions. To get the full tables, check out the IRS website to view exactly what amount you can contribute. Personally, I like the Roth IRA because you never know what tax rates are going to look like in the future and you already know you will be getting your distributions tax free.

If you are looking to fund your retirement, I always recommend that you max out your IRA before looking into other options. Unless you have a match with your current employer, then I would maximize the money that your employer is willing to match.  It is also good to have a plan, so I would contact your financial adviser and see what he has to say. If you have any questions that weren’t answered in this article, please leave a comment below or contact me from the contact page

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