When it comes to saving for retirement, there are a lot of options to choose from. One of the most popular choices is the IRA. There are two main types of IRA – Roth and Traditional. They are similar, but differ in terms of taxation, funding, and more. We’ll discuss their similarities and differences so that you may have a better understanding of which one would be more beneficial for you.
What is an IRA?
An IRA, or Individual Retirement Account, is a savings account that comes with certain tax benefits. These benefits make it an attractive choice for many people who are saving for retirement. Both Roth and Traditional IRA have these tax benefits, but they differ in how they are taxed.
Taxes
With a Roth IRA, you pay taxes on the money you contribute now. This means that when you withdraw the money in retirement, it is tax-free. Traditional IRA works differently. You do not pay taxes on the money you contribute now, but you will pay taxes on it when you withdraw it in retirement.
Funding
Roth IRA also has different rules regarding funding. You are allowed to contribute to a Roth IRA after-tax. Traditional IRA contribution are made with pre-tax money, which means you may have to pay a penalty if you withdraw them before retirement. For 2022, both Roth and Traditional IRAs have a contribution limit of $6,000. However, traditional IRA’s are eligible for a catch up contribution if you are still working and over the age of 50.
Required Minimum Distributions
Finally, Roth IRA has no required minimum distributions (RMDs) while Traditional IRA does. RMDs are the amount of money that you are required to withdraw from your IRA account each year once you reach age 72. With a Roth IRA, you are not required to take RMDs, which means that your money can continue to grow tax-free for as long as you want. Both Roth and Traditional IRA have their own set of benefits and drawbacks. It is important to consider your own circumstances and decide which IRA might be beneficial for you. Please give one of our financial advisors a call to discuss whether an IRA is right for you. We can help you understand the ins and outs of IRAs so that you can make the best decision for your retirement savings.
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