If you’re scratching your head over a Roth IRA versus a traditional IRA trying to decide which one is most appropriate for you, read on! Armed with the proper information, you can easily sift through the details to make the suitable decision for your retirement moving forward. Let’s start with what exactly a Roth IRA is. Basically, it’s a retirement account that allows you to pay taxes on the money going in, which makes all future qualified withdrawals tax-free going out. So, while there’s no tax deduction up front, all Roth distributions are tax-free, as long as you follow the rules. You also have the flexibility of withdrawing your contributions (but not your earnings) at any time without paying taxes or penalties.
You can contribute to a Roth IRA at any age, as long as you have earned income from a job, allowing you to take advantage of this investment vehicle well into retirement (but you must continue to work in some capacity). Single taxpayers must have a modified adjusted gross income (AGI) of less than $131,000 in 2015 to contribute to a Roth IRA. Married couples filing jointly must have AGIs of less than $193,000 in 2015. Of course, for a traditional IRA, there are no limits—anyone with an earned income who is younger than age 70 ½ can contribute to a traditional IRA.
Tax incentives also vary between traditional and Roth IRAs, and both provide generous tax breaks. Claiming these breaks depends largely on timing. Traditional IRA contributions are tax deductible on both state and federal tax returns the year you make them, and withdrawals are taxed. So, with a traditional IRA you’re paying no taxes up front, and with Roth IRAs, you’re paying taxes up front to avoid taxes at the time of a qualified withdrawal. Before you choose either type of IRA, you should consider what your income tax rate will be in retirement compared to what it is now.
Contributions to traditional IRAs can lower your taxable income the year you contribute, lowering your AGI and helping you qualify for other tax incentives. And, up to $10,000 of a traditional IRA can be withdrawn without penalty for qualified first-time homebuyers (the distribution is taxed) for homebuyer expenses. With a Roth IRA, qualified first-time homebuyers can also withdraw up to $10,000 of their earnings penalty free for homebuyer expenses.
For either the Roth IRA or a traditional IRA, Congress makes the rules, so they’re subject to change at any time. The benefits for you in retirement with either one of these investment options may be different than what they are now, so it’s best to consult your tax professional and a financial professional such as a Certified Financial Planner® from Mooney Lyons. Call us at 1.847.382.2600, or visit us at mooneylyons.com for more information on a comprehensive financial strategy for your retirement.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The Roth IRA offers tax deferral on any earnings in an account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRA penalty tax.