Roth IRAs vs. Traditional IRAs

Individual Retirement Accounts (IRAs) allow you to save money for retirement while also catching a tax break on your retirement investment. Both Traditional and Roth IRAs help you save for later in life, but by recognizing their differences, you can choose the one that is right for you.

Tax

Roth IRAs and Traditional IRAs both offer great tax benefits and minimize the impact of taxes, which is essential to building wealth. Their primary differences:

• Traditional IRAs are taxed when you take money out of your account, while Roth IRAs are taxed beforehand.
• You can claim a tax deduction on Traditional IRAs the year you make your contribution (if you earn less than $71,000 a year).
• With Roth IRAs, your investment grows tax-free.
• With Roth IRAs, you can withdraw all the profits tax-free after you turn 59.5 years old.

Contributions

The IRS puts a cap on the amount you can contribute to your IRA each year, but each IRA has its own rules on when you can contribute.

• Both Roth and Traditional IRAs have annual contribution caps of $5,500, but that number goes up to $6,500 after you turn 50 years of age.
• Traditional IRAs only allow you to contribute to your account until you are 70.5, while Roth IRAs let you contribute no matter your age.
• Roth IRAs require your first contribution to be made at least 5 years before starting qualified distribution.

Withdrawals

Sometimes withdrawals from IRAs are necessary in case of financial emergencies or crises, other times you may just be ready to start using the money you built up in your IRA. When choosing an IRA, it is important to consider the restrictions that each kind has on withdrawals, because you might find yourself eventually looking to withdraw.

• Both IRAs require you to be at least 59.5 before withdrawing any amount from the account.
• Traditional IRAs require that you make withdrawals before you turn 70.5. With Roth IRAs, you are never required to make a withdrawal.
• If you choose to withdraw early on earnings before age 59.5 from a Roth IRA, you the amount is subject to a 10% federal penalty tax.
• With Roth IRAs, you are allowed to withdraw from your principal at any time.
• Traditional IRAs have a 10% federal penalty tax on withdrawing from contributions or earnings.

If you are trying to decide if a Roth or a Traditional IRA is better for you, let us help. Speak with one of Cinfed’s financial advisors today.