Roth or Traditional IRA? 3 Things to Consider
Published on 3/31/2020
If you are part of the gig workforce, figuring out how to save for retirement may be overwhelming. What do you do when there is no employer sponsored 401(k) plan?
Individual retirement accounts offer two of the most popular personal retirement savings options: Roth IRAs and Traditional IRAs. Determining which is best for you depends on your long-term goals and needs.
Here are the three main differences:
Tax Breaks: The question is whether you want to pay taxes now or later. With Traditional IRAs, your contributions are tax deductible for the year you make them, but you pay taxes when you withdraw your money in retirement. Conversely, with Roth IRAs, there’s no tax break for contributions, but withdrawals are generally tax-free.
Withdrawals: Both Traditional and Roth IRAs allow you to start penalty-free, “qualified” distributions at age 59½. With Traditional IRAs, at age 70½ you must start taking mandatory, taxable withdrawals of a certain percentage of your funds (RMDs) regardless of need. One neat benefit of Traditional IRAS is even if you are younger than 59½, if you need money for certain first-time home buyer costs or some higher education expenses, you can withdraw up to $10,000 without the normal 10% early-withdrawal penalty.
For Roth IRAs the first contribution must be made at least five years before the first withdrawal, or you’ll incur a tax payment. If you need funds and are younger than 59½, Roth IRA contributions (not earnings) can be withdrawn penalty and tax free at any time. Unlike Traditional IRAs, Roth IRAs don’t have any mandatory withdrawals, so some experts have touted this benefit as a way to keep building wealth tax-free.
Contributions: Roth IRAs don’t have age restrictions for contributions. They do have income-eligibility restrictions for single and married couple contributions.
As long as you are younger than 70½, you can contribute to Traditional IRAs.