When it comes to investing for retirement, there are a lot of options out there. Two popular choices are traditional individual retirement accounts (IRAs) and Roth IRAs. While both types of accounts offer tax advantages, there are some important differences that investors should consider before making a choice.
Taxes Associated
One key difference between traditional and Roth IRAs is when you pay taxes on your contributions. With a traditional IRA, you make contributions with pre-tax dollars, which means you'll owe taxes on the money you withdraw in retirement. With a Roth IRA, you make contributions with after-tax dollars, so withdrawals in retirement are tax-free. This can make a big difference in how much money you end up with in retirement.
RMDs
Another difference between the two types of accounts is how they handle required minimum distributions (RMDs). With a traditional IRA, you must start taking RMDs at age 72. These withdrawals are mandatory and subject to income tax. With a Roth IRA, there are no RMDs, so you can leave your money in the account for as long as you like.
Limits on Contributions
There are also income limits to consider when choosing between a traditional and Roth IRA. With a traditional IRA, anyone can contribute, but your ability to deduct those contributions from your taxes depends on your income level and whether you have access to a retirement plan at work. With a Roth IRA, there are income limits on who can contribute directly to the account. If you earn too much, you may not be able to contribute at all.
Conclusion
Ultimately, the choice between a Roth IRA vs a traditional IRA depends on your circumstances and goals. If you think you'll be in a lower tax bracket in retirement than you are now, a traditional IRA may be the way to go. If you want tax-free withdrawals in retirement and don't mind paying taxes on your contributions now, a Roth IRA may be a better choice. Whatever you decide, make sure to consult with a financial advisor to help you make an informed decision that's right for you.
If you have any questions or want to learn how to set up a traditional and/or Roth IRA contact Vernon Management Group at rustyvernon@vernonmanagement.com.
This is not tax advice. Please consult your tax advisor before making any tax decisions
*Please consult your tax advisor before you make decisions that involve tax laws
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