What’s the Difference Between a Roth IRA and a Traditional IRA?

What’s the Difference Between a Roth IRA and a Traditional IRA?

Date: October 02, 2018,

Understanding your different options for saving for retirement can be confusing, which is why it is important to do your homework and speak with a financial professional. The following provides a review of two of the most common savings options: Roth IRAs and traditional IRAs. More answers to any specific questions you have about the two or which one is better for your financial situation, contact Harvest Financial Planning, LLC.

Tax Differences

One of the biggest differences between an IRA and a Roth IRA is how the contributions and withdrawals are taxed. A draw of traditional IRAs is that contributions are tax-deductible, which can help to lower one’s tax bill. However, because the contributor doesn’t have to pay taxes on the amount that they’re putting in on an annual basis, they will be taxed upon withdrawal at the standard income tax rate. Contributions to a Roth IRA, on the other hand, are not tax-deductible but neither are they taxed upon withdrawal. Not paying any money upon withdrawal of funds can be a huge benefit, especially as it is impossible to know what future tax rates will be.

Withdrawal Rules

Another difference between Roth IRAs and traditional IRAs1 is when you can withdraw the money, and the penalties associated with early withdrawal. Both savings account types allow owners to begin making penalty-free withdrawals at age 59.5. For traditional IRA holders, up to $10,000 can be withdrawn early to pay for higher education or first-time homebuyer expenses (such as a down payment). With a Roth IRA, you can withdraw contributions (but not earnings) at any time without incurring a penalty.   

Required Minimum Distributions

Finally, it’s important to understand the idea of a required minimum distribution (RMD). With a traditional IRA, an RMD is required as soon as you turn age 70.5, regardless of whether you need the money or not. If you don’t take out the money as required, you can face a steep penalty: a 50 percent fine on the amount you were supposed to withdraw.

Learn More About IRAs Today

There is no doubt that both traditional IRAs and Roth IRAs have their advantages and drawbacks, and that both can be a smart part of a savings plan. As you start to think about your future, opening an IRA, Roth IRA, or both may be wise. To learn more about the differences and which is most appropriate for you, call our team at Harvest Financial Planning, LLC today or send us a message using the contact form on our website.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Ther tax treatment may change.

1 – https://www.cnbc.com/2018/01/16/5-key-differences-between-roth-and-traditional-iras.html