Individual retirement accounts can be a great addition to a healthy retirement portfolio, but it’s important to determine whether a Traditional or Roth IRA is right for you.
The Similarities
The yearly contribution allowed to both of these IRA types, as of 2023, is $6,500, $7,500 if you are 50 or older. In general, these contributions should be made by the upcoming tax deadline.
For both types of IRAs, the money deposited must come from your income earned through employment, self or not, and cannot come from other sources such as rental properties or other retirement accounts. Spouses who do not work can open these accounts in their name based on the other partner’s income, but a joint federal return must then be filed.
The Differences
For starters, only traditional IRA contributions have the potential to be deductible come tax season. This will be based on whether or not you or your spouse currently have an employer-sponsored retirement plan, such as a 401(k) or 403(b), and how much is being contributed to that plan each year.
Roth IRAs have less strict withdrawal requirements than do traditional IRAs. Once money is deposited into your traditional IRA, that money should not be withdrawn until age 59.5 or it will be subject to income taxes and a 10 percent penalty. There are a few exceptions, but it is best to wait until 59.5 when there will no longer be a 10 percent penalty and you will only be responsible for income taxes on the amount withdrawn.
With Roth IRAs, the money you deposit into these accounts can be withdrawn at any time, but this does not apply to the earnings on the account. The earnings cannot be touched until the account has been held for at least 5 years and the owner has reached age 59.5. If you withdraw the earnings before these factors apply, income taxes and a 10 percent penalty will be applied.
Making Decisions
If your earnings in retirement may be lower than they are now, deferring paying income taxes on your IRA contributions may be beneficial, and a traditional IRA may be the best choice.
For estate planning purposes, a Roth IRA may be a better choice due to your heirs not having to pay taxes on the amounts withdrawn (given that the account was held for longer than 5 years) once it is passed on and you won’t have to make required minimum distributions while still alive.
Given that you qualify for a Roth IRA (your modified adjusted gross income is lower than $138,000), you might even consider splitting your contributions between a Roth and a traditional IRA.
Overall, the decision as to which type of IRA to choose is never a simple one. Your current and future financial situation will need to be considered, and speaking with a financial professional might be wise. To schedule a complimentary financial review with Moore’s Wealth Management, click here or call our office at 770-535-5000, where a staff member is awaiting your call Monday through Friday, 9 AM to 5 PM.
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Individuals are encouraged to consult their tax and legal advisors (a) before establishing or changing a Retirement Account or Retirement Plan, and (b) regarding any potential tax, ERIS,A and related consequences of any investments or other transactions made with respect to a Retirement Account or Retirement Plan. Tax laws are complex and subject to change.
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