A traditional IRA allows you to make pre-tax contributions toward your retirement. The funds grow tax-deferred. Any interest, capital gains, or dividend income from the original funds will grow tax-deferred until withdrawal.
With a self-directed traditional IRA at Entrust, you have the freedom to invest your retirement funds in alternative assets and investments that inspire you.
Traditional IRA Features
- Potential tax-deductible contributions
- Tax-deferred earnings
- Pay taxes when you take distributions on taxable amounts
- Required minimum distributions begin at age 73
Eligibility requirements
You’re eligible for a traditional IRA if you’ve received taxable compensation during the year. If you and your spouse have both received compensation during the year, you can each establish an IRA. However, if filing a joint tax return, only one spouse is required to receive compensation and they can contribute on behalf of the other spouse.
Contribution Limits
Before making contributions to a traditional IRA, learn the contribution limits that apply:
A Roth IRA is an individual retirement account that is funded with post-tax dollars. The tax benefit of a Roth IRA is that all earnings, including interest, capital gains, etc., grow tax-free. You pay income taxes on your initial contributions.
There are several exceptions that allow you to make a penalty and tax-free withdrawal from a Roth IRA. You can distribute your account earnings tax-free and penalty-free if you satisfy the five-year period and meet one of the following reasons:
- Attainment of age 59 ½
- Disability
- First-time home buyer (maximum $10,000)
- Death
The five-year period means its been at least five years since you have contributed to your first Roth IRA. The clock for the five-year period begins as of January 1 of the year for which a contribution was made. For example, if you make a contribution in July of 2024, the clock started as of January 1, 2024.
Roth IRA Features
- If you expect your tax rate to be higher in the future, contributing to a Roth may lower your cumulative tax liability
- Pay income taxes now in return for tax-free growth on your investment earnings
- Provide tax-free income in retirement
- No required minimum distributions
- Withdraw your original contributions at any time without penalty
Eligibility requirements
You may contribute to a Roth IRA if the following requirements are met:
If you and your spouse have received compensation during the year, you can both contribute to your own Roth IRA. However, if you are filing a joint tax return, only one of you is required to have compensation, and you can contribute on behalf of your spouse.
Contribution Limits
Before making contributions to a Roth IRA, learn the contribution limits that apply:
Here are the key differences between Roth and Traditional IRAs:
Traditional IRA Features
- Contributions may be tax-deductible
- Required minimum distributions begin to occur annually at age 73
- Funds withdrawn before age 59½ are subject to 10% penalty
- Taxes on earnings aren’t due until withdrawn from the IRA
Roth IRA Features
- Contributions are not tax deductible
- No required minimum distributions
- Original contributions can be withdrawn penalty-free at any time
- Earnings accumulate tax-free, providing the potential for significant growth over time
Earnings can be withdrawn tax-free after certain requirements are met. The difference between traditional IRAs and Roth IRAs lies in their tax advantages.
When evaluating which account is best for you, ask yourself if you expect your tax bracket to be lower or higher in retirement. In any case, consult your tax or financial advisor to make sure you make the best decision based on your financial situation.
