The debate over Roth vs. Traditional IRA accounts, and which one is better, comes down to two things, mostly: flexibility and taxes.
Roth IRA's requires paying taxes up front but offer more flexibility later and may be the best option for many people. In a Roth, the benefit stems from the fact the money already is taxed, so it's able to grow tax-free. The Roth, which has income limits for eligibility, also typically comes with fewer restrictions than a Traditional IRA, which is generally taken pre-tax. However, it will be taxed when it is drawn in retirement.
Below is a chart that outlines the differences of the two.
Tax-free growth and tax-free qualified withdrawals.
Tax-deferred growth and tax-deductible contributions.
Contribute at any age.
Contribute until you're 70½.
Your income affects how much you can contribute. See top left back side of the below Charts:
Your income affects how much you can contribute. See top left back side of the 2018 and 2019 Financial and Tax Planning Chart. (left of this box)
You won't pay taxes when you withdraw your contributions, and you won't pay federal taxes on your earnings, as long as the five-year aging requirement has been met.
You will pay taxes when you withdraw your pre-tax contributions and when you withdraw any earnings.
If you make withdrawals before you're 59½, you might have to pay taxes on your earnings plus a 10% additional tax.
If you make withdrawals before you're 59½, you might have to pay a 10% penalty.
Required Minimum Distributions
RMD's do not apply during your lifetime.
RMD's must be taken starting in the year you turn 70½.
It's tempting to save money on taxes in the short term but it may be more beneficial to pay the taxes early in your career, when you're in a lower tax bracket, rather than wait to pay the taxes at retirement, when people are more likely to be in a higher tax bracket.
People in the middle of their career also should think about tapping into a Roth IRA, which are still relatively new. It's more likely these people have been investing in a tax-deferred 401(k), 457 or 403(b) employer plan and it might be time to get into a Roth. Ideally, it's good to have a combination of both types.
For people nearing retirement, they also should consider a Roth for its "lifetime considerations." Roth withdrawals can be taken out at any time, which can be a benefit to high-income earners who may not need to start withdrawing until later in retirement. Traditional IRAs require people start withdrawing by age 70.5.
Roth IRAs also are good for people who want to leave money for heirs because the money won't be taxed upon disbursement.
If you have further questions about which IRA fits your goals and needs, want to make a contribution for 2018 or in 2019 and going forward, please contact our office at 207-761-4733 or [email protected]
David Hanson & Carl Hanson, CFP®