Deductions to a traditional IRA are tax deductible up to certain income limits. For all the years that you contribute to your traditional IRA, you don’t pay taxes on that money. You will however pay taxes on it when you withdraw your funds at retirement. If you’re counting on having a lower tax rate when you withdraw your money than when you make deposits, a traditional IRA could help you put more of your money in your pocket today. If your single and under the age of 50, you can contribute up to $5,000 per year, with the ability to add an additional $1,000 per year after you turn 50 years old. And, while there are income limits for the amount of contributions you can make, you can start contributing to a traditional IRA at any age, up to 70½. If you withdraw your funds before the age of 59½ , you’ll face a penalty, but you don’t need to start withdrawing your money until age 70½ .
Roth IRA vs. Traditional IRA
A Roth IRA has the same contribution limits as a traditional IRA, but there are several notable differences. Instead of your income being tax deductible when you contribute, you actually pay taxes on the money you contribute to your Roth IRA today, and don’t pay taxes until you withdraw it upon retirement. This is especially beneficial if you believe you’ll be wealthier or in a higher tax bracket when you retire than you are today. Plus, you won’t be affected if taxes go up in the future since you’re paying the rate of today’s taxes on your retirement money.
While both retirement accounts will give you a competitive rate and predictable growth toward your retirement income goals, the main consideration is whether you’re likely to make more money working today than you do when you retire, or vice versa. This will determine how much you’ll ultimately pay in taxes on the income you put away for retirement. And, while a traditional IRA has a penalty for withdrawal, the Roth IRA lets you withdraw your money at any time no matter what age you are. This flexibility allows you to tap into needed funds in case of an emergency. And, as long as you are age 59½ or older and your Roth IRA has been open for at least five years, you can start collecting on your contributions.
While both retirement accounts will give you a competitive rate and predictable growth toward your retirement income goals, the main consideration is whether you’re likely to make more money working today than you do when you retire, or vice versa. This will determine how much you’ll ultimately pay in taxes on the income you put away for retirement. And, while a traditional IRA has a penalty for withdrawal, the Roth IRA lets you withdraw your money at any time no matter what age you are. This flexibility allows you to tap into needed funds in case of an emergency. And, as long as you are age 59½ or older and your Roth IRA has been open for at least five years, you can start collecting on your contributions.
Getting Started with an IRA
Interested in learning more? Look for a trusted financial institution that offers helpful charts to show you the major advantages and differences between a Roth IRA and a Traditional IRA. You should also compare rates and fees, as well as learn more about rolling over or transferring your IRA from your previous job to your current one.