One of the first decisions you’ll face when you start saving for retirement is, “How?” Individual retirement accounts—called IRAs—are one of the smartest ways to save. They’re smart because your savings will grow tax-deferred.
There are two primary types of IRA: Traditional and Roth. (Other IRAs exist for people who are self-employed or who own small businesses. Learn more about these IRAs.) It’s important to know the tax advantages gained with a Traditional and Roth IRA. Choosing one of these options or the other can result in significant differences in the amount of wealth you accumulate over time.
The question as to which is more advantageous comes down to when you want to be taxed: now or later.
Traditional IRA
Contributions are made out of your earned income. You may use your contribution amount as a tax deduction, the year you make the contribution.
- The funds grow tax-deferred.
- You pay taxes on the taxable portion of your distributions when you start to take them.
- Additional penalties may apply to the distribution if you are underage 59 ½. Exceptions may apply
Roth IRA
An individual can open and make contributions to a Roth IRA if both of the following requirements are met:
- Taxable compensation has been received during the year.
- Your modified adjusted gross income (AGI) does not exceed the Roth income limits.
The answer will be different for different people. Here are a few things to consider while making your decision:
- Your age. Young investors who are just starting out their careers might expect larger increases in their compensation over time than older investors who are nearing retirement age.
- Your anticipated tax bracket when you start taking distributions. The amount of income you will need may be a factor on how much taxable income you will have during your retirement. This may help determine your projected tax bracket during retirement. If you wish to reduce your taxable income, consider splitting contributions between a Traditional and a Roth IRA.
- How much you plan to contribute annually. Contribution limits to IRAs may vary according to the type of IRA, your filing status, and income level. There is no income limit to IRA contributions to a Traditional IRA.
Contact The Entrust Group to speak with one of our trained professionals about which IRA would be best for you or call us toll-free at 800-392-9653.