Roth vs.Traditional IRA

Roth IRA, Traditional IRA, Individual Retirement Account, retirement, savings,

Roth or Traditional IRA? Here are the answers to your questions.

Tax season is in full swing. That means it’s time to take advantage of a great opportunity to save for the future– with an individual retirement account or IRA. But, before of the April 15th deadline. Here are answers to common questions about Roth and Traditional IRAs to help determine the one that’s best for your situation.

What is a Traditional IRA?
A Traditional IRA is a tax-advantaged retirement savings vehicle that allows earnings and contributions to grow tax deferred. You pay taxes in retirement, when you’re likely to be in a lower tax bracket.

What is a Roth IRA?
Unlike with a Traditional IRA, the contributions for a Roth IRA are not tax-deductible, but you can withdraw your earnings tax-free after the five year aging requirement has been met and you reach age 59.5.

What are the benefits/features of a Traditional IRA?

Traditional IRAs offer many benefits, including:

• Tax-deductible contributions (subject to your filing status, and whether you are participating in another plan, such as a 401k – consult your tax advisor)
• Earnings grow tax-deferred.
• The ability to make voluntary withdrawals at 59 ½. Mandatory withdrawals are required at age 70 ½.

What are the benefits/features of a Roth IRA?

In contrast, a Roth IRA offers these benefits:

• You are not required to take mandatory distributions at age 70 1/2.
• Tax-free earnings for qualified distributions.
• Principal contributions can be withdrawn at any time (though a 10% penalty may be incurred for non-qualified distributions).

Why would you want one versus the other?
The biggest difference between a Traditional IRA and Roth IRA is the way taxes are paid. If you choose a Traditional IRA, the amount you contribute to your IRA is taken off your taxable income. So if you make $60,000 in a year and contribute $2,000 to an IRA, your taxable income would be $58,000. At age 59 ½, you can begin withdrawing funds from your IRA without penalty. When you do, you will be taxed on the earnings and dividends you make.

In contrast, with a Roth IRA any contributions you make will not be deducted from your taxes. So if you make $60,000 in a year and contribute $2,000 to your Roth IRA, your taxable income is still $60,000. You can, however, withdraw the principal before you retire without penalty. In addition, when you reach retirement age, you can withdraw all the money (including the earnings) without paying taxes on the amount withdrawn.

What are the income qualifications to open a Roth or Traditional IRA?
Another major difference between the Roth and Traditional IRA involves income restrictions. There are no income restrictions on a Traditional IRA. Roth IRAs, however, are available only to those making up to $112,000 or to married couples making a combined maximum of $178,000 annually.

Tax-free or Tax-deferred
The most important thing to consider when evaluating both options is determining whether you need tax savings today or in retirement. With a Traditional IRA, you’ll save now; with a Roth, you’ll save in retirement.

We’d be happy to provide more information on the options available to you and help you choose the IRA solution that best fits your needs. Call us at 817-390-2380 or stop by any one of our Banking Centers. For more specific information about your situation, speak with your tax advisor.

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