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Traditional vs. Roth IRAs

An IRA account can be a very useful retirement savings tool for virtually anyone. These accounts allow you to personally control part of your overall retirement nest egg. You may be able to invest 100% of your taxable compensation in Traditional and/or Roth IRAs, up to the annual limit, which is set by the IRS periodically to adjust for inflation.

Traditional IRAs

Anyone who earns income is eligible to contribute to a Traditional IRA, potentially benefitting from tax-deferred growth on earnings. Those who meet income requirements can deduct their contributions from their current taxes.  You can take distributions from your IRA at any time, and the earnings and tax-deductible contributions are taxed as ordinary income at the time of distribution. Note that if you are less than 59 1/2 years old, you may have to pay a 10% additional tax . You will be required to start taking distributions by April 1 of the year following the year in which you reach age 70 1/2. These are known as "required minimum distributions" (RMD), and tax penalties will result if you do not receive a distribution. Consult your tax advisor for more details.

Is a Traditional IRA a Good Fit?

A Traditional IRA may be a good choice for you if:

  • You are eligible to make tax-deductible contributions;
  • You cannot contribute to a Roth IRA because you earn too much income;
  • You want to save money and then convert to a Roth IRA later; or
  • You expect to be in a lower tax bracket when you retire.

Roth IRAs

Roth IRAs differ from Traditional IRAs in their tax treatment. With a Roth IRA, you pay taxes before you make contributions rather than at the time you take a distribution. If the holding period requirements are met, the earnings that accumulate in your Roth IRA can be withdrawn tax-free. Not everyone qualifies to contribute to a Roth IRA; there are income limits set by the IRS. Your Roth IRA funds can generate a stream of tax-free income for you in retirement. If money remains in the account after your death, your heirs may receive tax-free income as well.  Consult your tax advisor for more details.

Is a Roth IRA a Good Fit?

A Roth IRA may be a good choice for you if:

  • Tax-free income is a priority for you;
  • You wish to avoid taking required minimum distributions (RMDs) from your IRA at age 70-1/2 (distributions are required from a Traditional IRA at that age);
  • You expect to be in a higher tax bracket when you retire; or
  • You have a desire to leave your heirs with a tax-free income source.

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