By: Michael Crotty
When it comes to retirement vehicles. Our conversations with clients always start with an education on IRA vs. Roth IRA and which is right for you and your family.
Let’s start with what an IRA is. An IRA is an individual Retirement account that an individual can open and deposit up to $6,000 per year. If you are over 50 years old, you can deposit up to $7,000 per year. You have until April 15th every year to make your deposit for the prior year.
The major difference of a Traditional IRA and a Roth IRA comes down to when you are taxed on your money.
A traditional IRA allows you a tax deduction in the tax year when you make the deposit. The money then grows tax-deferred while invested and you are taxed as ordinary income when you withdraw from the account typically after the age of 59.5.
A Roth IRA works in the opposite direction. You deposit money without a tax deduction. The money still grows tax-deferred while invested. You then can withdraw the money completely tax-free after age 59.5.
The decision of which type to use comes down to a few questions.
- What tax bracket are you in now?
- What tax bracket will you be in at retirement?
- Which one is higher?
- How much of your existing savings in either account? Do you have a balance between them or are you overfunded in one manner?
- Do you want to have tax flexibility in retirement by having both accounts?
If you aren’t sure of which account is right for you after these considerations, we are here to help.