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Roth and Traditional IRA Near Saratoga Springs, NY

Roth IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account that allows certain qualified withdrawals tax-free given that requirements have been met. A Roth IRA can be a solid option if you believe that your taxes may be higher in retirement than they are right now.

Roth IRA Rules & Contributions Limits:

Contribution limits can change annually, so it is essential to pay attention to this and consult your financial advisor to maximize contributions and minimize tax. A Roth IRA can continue to be maintained indefinitely, and there are no minimum required distributions. Contributions can continue to be made at any age, so long as the account owner has qualified earned income.

Roth IRA Funding & Other Information:

There are numerous ways to fund a Roth IRA, including regular contributions, spousal contributions, transfers, rollover contributions, and conversions. Regular Roth IRA contributions must be made in cash (checks included) and cannot be made in securities or assets. Many investment varieties exist within the Roth IRA after contributions are made, though. Options include mutual funds, stocks, bonds, ETFs, CDs, and money market funds.

Traditional IRA

What is a Traditional IRA?

A traditional IRA is an individual retirement account that allows pre-tax income to be directed toward investments that can grow tax-deferred. Taxes are not assessed until qualified withdrawals are made. Taxes assessed are done so at the individual’s tax rate at retirement. This is important to keep in mind as you consider utilizing a traditional versus a Roth IRA because your individual tax situation may change as you near retirement.

Traditional IRA Rules & Contribution Limits:

Contributions made to a traditional IRA may be tax-deductible depending on income, filing status, and other factors. Individuals can contribute one hundred percent of their earned income to a traditional IRA up to a specific dollar amount. Traditional IRAs have contribution limits, and they have required minimum distributions. When you have a traditional IRA and other retirement plans, the IRS may limit the amount of traditional IRA contributions that can be considered tax-deductible.

Traditional IRA Distributions & Other Information:

When an individual receives distributions from a traditional IRA, the IRS considers the money regular income, and it becomes subject to income tax at this time. Currently, after age seventy-two, account holders must begin taking required minimum distributions from traditional IRAs. If funds are taken from a traditional IRA before retirement age, there is a penalty fee for early withdrawal.

Roth IRA vs. Traditional IRA ⏐ Key Differences

  • Roth IRAs are funded with after-tax dollars, and contributions are not tax-deductible. Once qualified withdrawals begin, the funds are tax-free.
  • Traditional IRA deposits are made with pre-tax dollars. Taxes are paid upon withdrawal at retirement.
  • Traditional IRAs are similar to personal pensions in that there are considerable tax breaks, but there are restrictions to fund accessibility.
  • Roth IRAs are more like regular investment accounts, except they have tax benefits. There are fewer restrictions but fewer tax breaks.

Essentially, the differences boil down to whether you want to owe the IRS now or later. Accessibility of funds and eligibility standards differ as well. Speaking with your financial advisor about maximizing your retirement contributions and diversifying your investments is crucial in saving for retirement and mitigating tax liability.

Key Takeaways

Hiring a financial professional to help make decisions about how you will save for retirement will make a big difference. You can maximize contributions and mitigate tax liability with the advice from the right financial advisor. Contact a financial advisor with Cooney Financial Advisors, INC. today.