When preparing for retirement, the general rule of thumb is to plan far ahead – even if retirement doesn’t seem remotely feasible to your current situation.

There are two major types of individual retirement accounts (IRAs) that are offered at Bank of Bozeman: traditional IRAs and Roth IRAs. Let’s define both accounts.

  • Traditional IRAs – A traditional individual retirement account allows people to contribute to investments without tax penalty until that money is withdrawn. Investment professionals typically recommend a traditional IRA to those who expect to have a lower tax rate after retirement than it is right now.
  • Roth IRAs – Roth IRAs are retirement plans in which the contributions made are included on your taxes, meaning you can’t deduct any contributions on income taxes. The upside is that future withdrawals (pre or post-retirement) are tax-free. If you expect your tax rate to be higher post-retirement than your current rate, a Roth IRA might be for you.

Although a brief explanation, IRS requirements for investment savings accounts usually necessitate a bit more planning and careful navigation of tax code in order to keep on the straight and narrow and to avoid unintended penalties, both now and post-retirement. Before you call up your financial institution of choice and inquire about an IRA, let’s go into more depth into the differences:

When a Roth IRA Might be Right for You
If you’re in a low tax bracket (anything in the low 20th percentile or below), you’re likely either in the early stages of your career or have recently changed careers and a Roth IRA might be the right choice. This is because withdrawals from Roth IRAs aren’t subject to income tax, allowing you to take money from the account without tax penalty in the event of a financial emergency. But once you retire, you’ll be able to draw income from those accounts without paying Uncle Sam even if your tax rate has gone up.

When a Traditional IRA Might be Right for You
If you’re close to retirement age or are in a higher income tax bracket, a traditional IRA allows you to take a tax deduction to maximize your income from a retirement savings account. Once a person reaches retirement age, they tend to move to a lower tax bracket due to moving to a lower-paying job, a part-time employment status, or drawing income from other sources (such as other savings, investment, or pension accounts). Though withdrawals from traditional IRAs are taxable as income once you reach 59 ½ years of age, you’ll save during tax season due to your lower income tax bracket during retirement.

Our investment professionals here at Bank of Bozeman are here to help with all of your retirement preparation questions and concerns. Committed to serving the community with local investments that stay right here in Gallatin County, we can help guide you through the differences between Roth IRAs and traditional IRAs no matter what stage of life you’re in. Contact us today to schedule an appointment or visit us right here in Bozeman to learn more.