“IRA” is an abbreviation for “Individual Retirement Account.” A traditional IRA and a Roth IRA are two different retirement options, each with its own pros and cons. Depending on your circumstances, either may be a good choice for growing your retirement dollars.
A traditional IRA is a retirement account for pre-tax contributions. The funds in the account can be used for investments that grow tax-deferred. Taxes are not assessed on a traditional IRA until you make a withdrawal. If you withdraw from an IRA before age 59 ½, you will pay a 10% early withdrawal penalty, in addition to all other taxes.
You can contribute up to 100% of your earned compensation to an IRA, up to a dollar amount set by the IRS. For 2020, the limit for all your traditional and Roth IRAs is $6,000, or $7,000 if you are age 50 or older.
A Roth IRA is a type of individual retirement account that was established and named after former Delaware Senator William Roth in 1977. It must be set up with an institution that has IRS approval to offer IRAs. Contributions in any given tax year must be made by the Roth IRA owner’s tax filing deadline. This is typically April 15 of the following year.
Provided certain conditions are met, a Roth IRA allows for qualified tax-free withdrawals. Unlike a traditional IRA, which is funded with pre-tax dollars, it is funded with after-tax dollars. However, the money is not taxed when it comes time to take distributions.
If you think your taxes may be higher in retirement than they are while you are working, a Roth IRA may be the better choice. When you retire and begin taking distributions from a Roth IRA, you will not be taxed on those funds. If your taxes are more now than you expect them to be in retirement, a traditional IRA may be your best option. Our knowledgeable agent will be happy to discuss your IRA options with you.