The Difference between Roth and Traditional IRAs

After learning about IRAs, one of the most common questions that people ask is what is the difference between the various types. As a result, this article reviews some of the primary differences between Roth and traditional IRAs.

The Primary Difference between the Two Types of IRAs

With traditional IRA accounts, the money that a person contributes to their account is not considered part of their taxable income for that year. Instead, once money is placed into a traditional IRA account, the amount is capable of growing without being taxed in the way that other types of traditional income are. Instead, the amount that is placed in a traditional IRA is taxed when a person withdraws money from the account and is taxed at whatever your ordinary income tax rate is in that year. A person, however, does not receive a deduction for contributions to a Roth IRA. Instead, income tax is placed on money that is then placed into the account where the amount grows in a manner similar to traditional IRA accounts.

Selecting between the Two Types of IRAs

If a person expects that their tax rate will remain the same or rise in retirement, a Roth account is generally a better option. This is particularly true for younger workers who are likely to make more later on their life and be taxed at a higher income rate. This does not mean, however, that traditional IRAs are not without their advantages.

Required Minimum Distributions

In situations where a person does not have a lot of time before retirement or an individual’s tax rate is likely to be lower once they retire, it is a better idea to select a traditional IRA account. No matter if a person selects a traditional, withdrawals referred as minimum distributions must be made after a person turns the age of 70 ½.  If a person inherits a traditional IRA, the individual must begin taking withdrawals over their lifetime or within five years after the original account holder passed away regardless of their age. If a person is still working, it is possible to delay required minimum distributions until April 1 of the year that the individual retires. Roth IRAs, however, are exempt from required minimum distributions. This means that many individuals decide to use Roth IRAs instead of traditional IRAs even if a person thinks that their tax rate will remain the same. It should also be briefly mentioned that another advantage of Roth IRAs is that a person is capable of withdrawing contributions at anytime without facing taxes or penalties.

Speak with an Experienced Accident Lawyer

If you have questions about selecting an IRA or have concerns about navigating obstacles created by an IRA that you own, you should not hesitate to speak with an experienced attorney. Contact Ettinger Law Firm today to schedule a free initial consultation. Our lawyer understands the complex issues involved with estate planning and can help address the various concerns that you might have with your estate.

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