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Traditional IRA or Roth IRA: 5 Things to Consider

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Finding the right retirement plan can be overbearing. Aventa Credit Union wants to make sure that our members understand what individual retirement account (IRA) is right for them.

Here are a few things to consider when choosing between Traditional or Roth IRAs.

What's the difference?

Traditional IRA: A traditional IRA is an account in which you contribute pre-tax or after-tax dollars, and then pay taxes when you withdraw your funds after age 59 1/2.

Roth IRA: You contribute after-tax dollars and can make tax-free withdrawals after age 59 1/2 or 5 years after the first contribution.

What are contributions?

Contributions are the annual amounts an individual is permitted to make to a traditional or Roth IRA. The contribution limits depend on the IRA type. As of 2023, individuals under 50 can contribute a total of $6,500, and individuals over 50 can contribute a total of $7,500. 

Should you contribute sooner rather than later?

There are benefits to contributing sooner than later. The sooner you contribute, the sooner your money will start growing tax-free. The more you wait, the more you miss out on a year’s growth.

Are there tax penalties?

When withdrawing your traditional IRA funds, the taxes paid will depend on your tax bracket. A penalty of 10% is applied if the account owner withdraws funds before turning 59 1/2 years of age. Individuals older than 59 ½ only have to pay federal and state income taxes.

Which IRA is right for you?

Now that you understand the basics of Traditional and Roth IRAs, you might wonder which is best for you. A major determining factor for many investors is based on their tax situation. For instance, if you believe your tax bracket is currently lower than what it will be in retirement, you might choose a Roth IRA so you contribute after-tax dollars, and your money grows tax-free. You can generally make tax- and penalty-free withdrawals after age 59½. However, if your tax rate decreases in retirement, you might be better off investing with a Traditional IRA, in which you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.

Key Benefits to Remember

Roth IRA:

-The contributions made with a Roth IRA are after-tax money, and any potential earnings grow tax-free.

-A Roth IRA allows you to withdraw your contributions tax-free and penalty-free 5-years after your first contribution or after age 59 1/2.

-However, there are specific IRS income limits for a Roth IRA. Including $129,000 for single and $204,000 for married filing jointly.

-By having a Roth IRA you are not required to withdraw a minimum amount of money at a certain age.

-However, withdrawals are required after the death of the IRA owner.

Traditional IRA:

-Contributions are generally made with after-tax money and are taxed during withdrawals.

-Any potential earnings grow tax-deferred and are not taxed until you withdraw them after age 59½.

-Anyone 18 or over with earned income can contribute to a traditional IRA.

-However, there are specific income limits for how much might be tax-deductible.

-Traditional IRAs require you to withdraw a minimum amount of money starting at 73.