There are lots of options to consider when choosing between Roth vs. Traditional IRA savings accounts. The good news is, you are taking the first step toward your savings and you are educating yourself about it. Good work!
Below we are going to consider some things such as taxes, limits, withdraws, contributions, and tax breaks.
With either savings account, there is one overarching similarity, they are both a means to save toward your retirement while taking advantage of either current or future tax percentages. The largest and most obvious differentiating factor between Traditional and Roth is that Traditional accounts tax the income when it is withdrawn while the Roth account taxes the money.. Let’s now dive into even more differences between these accounts.
There are quite a few stipulations to review when choosing a Traditional IRA for your retirement savings account. The first thing to note is that as long as you are 70 years and six months or younger you can contribute to this account. Secondly, Traditional IRA’s require you to start taking required minimum distributions (RMDs)—mandatory, taxable withdrawals of a certain percentage of your funds—at age 70 years and six months, whether you need the money at that point or not. If you are younger than 59 years and six months and you wish to make a withdrawal then you will be penalized 10% as an early-withdrawal fee.
A great benefit to a Traditional IRA account is that if you are under the age of 59 years and six months you can withdraw up to $10,000 from your account without the normal 10% early-withdrawal penalty to pay for qualified first-time home-buyer expenses and for qualified higher education expenses. Hardships such as disability and certain levels of unreimbursed medical expenses may also be exempt from the penalty, However, you’ll still pay taxes on the distribution.
As far as deposits go, the major differentiating factor to recognize is that Traditional IRAs do not tax the money coming into the account, only once it is withdrawn. It is important to note here that these two tax rates, from the time when you deposit to the time when you withdraw, WILL be different and that is where both savings accounts can benefit you. The key to picking the right account for you is whether you believe that your taxes/tax bracket will be higher now or when you are ready to withdraw.
Roth IRA accounts also have their fair share of benefits to offer. The significant difference here is that the money you deposit will be taxed, but the money you withdraw will not be taxed when you are ready to take it out. Like the Traditional IRA, there are stipulations when using a Roth IRA account. The first is that in order to be eligible you cannot have a modified adjusted gross income (MAGI) of more than $137,000, married couples filing jointly must have a modified AGI of less than $203,000.
The benefits start with the fact that your contributions (but not earnings on those contributions) can be withdrawn, and the penalty fee, anytime after the first five years of your account has been opened. If you are under 59 years and six months and your account has been open for at least five years, it is possible to withdraw from your account penalty-free for a home purchase. However, the amount you can withdraw changes yearly so check with your tax preparer for the correct amount.
Again, the major key to choosing what retirement fund will be best for you and your family depends on whether the tax rate you pay on your Roth IRA contributions today will be greater or smaller than the rate you will be paid on distributions from your Traditional IRA after you’ve retired (or have to start making those distributions at age 70 years and six months )
Both types of accounts have strengths and weaknesses. They also share some qualities. The first is that both accounts limit you to a $6000/ year contribution unless you are aged 50 or older then you may deposit $7000/year.
Another shared fact is that with both types of IRAs, you pay no taxes whatsoever on all of the growth of your contributed funds, as long as they remain in the account. No matter which way you look at it, that is a great investment.
Overall, if you are looking to invest your money into an account that will benefit you in the future no matter what, a Traditional or Roth IRA retirement account will be a great choice.