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What Are the Differences Between a Traditional IRA and a Roth IRA?

Sep 16, 2020

An IRA is a retirement savings account with potential tax benefits.  Along with your employer plan, setting up an IRA is a key step when starting your retirement savings plan. An important thing to consider is which type of IRA is most beneficial for you, a Traditional or a Roth?

What is a Traditional and Roth IRA?

A Traditional IRA is available to anyone, regardless of income; however, not everyone is eligible for a fully tax-deductible contribution. In a Traditional IRA, your money grows on a tax-deferred basis, meaning you will not owe income taxes until you withdraw the money from your account at retirement.

A Roth IRA is not tax-deductible, but your money grows tax-free. You fund a Roth IRA with after-tax contributions, the money grows tax-deferred and most distributions are tax-free at retirement.  You can withdraw money you contributed to a Roth IRA at any time without penalty, within certain IRS rules.

What is the big difference?

The biggest difference between a Roth IRA and a Traditional IRA is how and when you get a tax break. With a Traditional IRA, your contributions are potentially tax deductible in the year they are made, which might mean a smaller current tax bill.  Roth IRA withdrawals are not taxed during retirement.

A question to consider: Do you think your tax rate will be higher or lower in the future?  The potential answer to this question will help you choose the type of IRA that will give you the biggest tax benefit. This can be hard to answer, especially if you are years away from retirement.

Check your Eligibility

The IRS rules on IRA eligibility may make the IRA decision easier for you. Your current income can help decide if you’re eligible to contribute to a Roth IRA and/or how much of your contribution to a Traditional IRA you can deduct from this year’s taxes. Traditional IRA deductibility can be restricted if you or your spouse already have a workplace savings plan like a 401(k) or 403(b).  Consulting with your tax advisor may also be a good idea before choosing which type of IRA is best for you.

Making the Decision

When you’re ready to have a conversation or to set up an IRA, please visit our 1st MidAmerica Retirement Services program here to schedule a no-cost, no-obligation appointment!