Deciding between a Traditional Individual Retirement Account and a Roth IRA depends on several factors specific to your financial situation and retirement goals. Here’s a breakdown of the key differences to help you choose:
Tax Advantages:
- Traditional IRA: Contributions are tax-deductible now, but withdrawals in retirement are taxed as ordinary income.This can be beneficial if you expect to be in a lower tax bracket in retirement than you are now.
- Roth Individual Retirement Account: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free (including earnings).This can be better if you expect to be in a higher tax bracket in retirement or want tax-free income later.
Other Differences:
- Income limits: Both have income limits for eligibility to contribute.
- Contribution limits: Both have annual contribution limits ($7,000 in 2024, $8,000 if 50 or older).
- Required minimum distributions (RMDs):Traditional IRAs require RMDs starting at age 73, while Roth IRAs do not.
- Early withdrawal penalties: Both have penalties for early withdrawals (before age 59½), unless under certain exceptions.
Here are some questions to consider to help you decide:
- What is your current income and tax bracket?
- What do you expect your income and tax bracket to be in retirement?
- Do you need access to your retirement savings before age 59½?
- What are your overall retirement goals?
Once you have a better understanding of your situation, you can research more and consult with a financial advisor for personalized recommendations.
Here are some resources that you might find helpful:
- IRS website: https://www.irs.gov/retirement-plans/ira-deduction-limits
- Investopedia article:https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/
- NerdWallet article:https://www.nerdwallet.com/h/category/roth-and-traditional-iras
I hope this information helps!