IRA: Traditional vs. Roth

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IRA’s: Traditional & Roth

IRAs are great retirement investment instruments and the retirement strategists at Visionary Financial Group can help you today to make the most of the tax benefits offered by IRAs.

Traditional IRA:

A Traditional IRA is a tax-deferred savings account set up through an investment institution. IRA investing options can include stocks, bonds, mutual funds, and other investment instruments. One of the benefits of a Traditional IRA is the potential for tax-deductible contributions.

You can contribute directly to a Traditional IRA or you can transfer assets directly from a qualified plan, such as a SEP or a SIMPLE IRA. Transfers, also known as rollovers, can also be made from a qualified employer-sponsored plan, such as a 401(k) or 403(b), after you change jobs or retire.

Not everyone contributing to a Traditional IRA is eligible for a tax deduction. If you are an active participant in a qualified retirement plan, such as a 401(k) or a simplified employee pension plan, your IRA deduction may be reduced or eliminated, based on how much income you make. If your contributions are not tax deductible, you may be better served by another retirement plan, such as a Roth IRA. The retirement advisors at Visionary Financial Group can help you determine what retirement instruments are right for you.

The funds in a Traditional IRA grow tax deferred, which means you do not have to pay taxes on the earnings until you start receiving distributions. Withdrawals are taxed as ordinary income. If taken prior to age 59 1/2, withdrawals may also be subject to a 10% federal income tax penalty, but there are some exceptions to this early-withdrawal penalty.

For Traditional IRA’s, you must begin taking annual required minimum distributions (RMDs) after you turn 70 ½.  If you don’t take your RMD, you will be subject to a 50% income tax penalty on the amount that should have been withdrawn. You can always withdraw more than the required minimum amount.

 

Roth IRA

Roth IRAs differ from Traditional IRAs in that you cannot deduct contributions made to a Roth. However, qualified Roth IRA distributions in retirement are free of federal income tax. This can be beneficial if you are in a high tax bracket in retirement or taxes go up in the meantime.

Another way the Roth IRAs can be beneficial is that you can contribute to a Roth after age 70 1/2 as long as you have earned income.  You also don’t have to begin taking mandatory distributions due to any age, as you would with a Traditional IRA.

Roth IRA withdrawals of contributions (not earnings) can be made at any time and for any reason.  Roth IRA’s are tax-free and are not subject to the 10% federal income tax penalty for early withdrawals. To qualify for a tax-free and penalty-free withdrawal from a Roth IRA after age 59 ½, it must have been in place for at least five tax years. Although qualified Roth IRA distributions are free of federal income tax, they may be subject to state and/or local income taxes. The ability to contribute to a Roth IRA phases out for taxpayers with higher incomes.

If you’re looking for a retirement savings vehicle with some distinct tax advantages, the Roth IRA may be appropriate for you. Visionary Financial Group offers independent financial planning solutions and personalized wealth management advice targeted to your retirement goals and financial circumstances. Let the investment advisors at Visionary Financial Group help you secure your retirement nest egg.

 

Traditional IRA versus Roth IRA:

Traditional IRAs

  • Tax deductible contributions (depending on income level)
  • Withdraws may begin at age 59 1/2 and are mandatory by 70 1/2
  • Taxes are paid on earnings when withdrawn from the IRA
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available to everyone; no income restrictions
  • All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception)

Roth IRAs

  • Contributions are not tax deductible
  • No Mandatory Distribution Age
  • All earnings and principal are 100% tax free if rules and regulations are followed
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually
  • Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions)

 

Call Shelly Dodge at 972/539-0002 today to schedule a complimentary consultation to review your financial goals and discuss which type of IRA is right for your retirement plan. 

Rolling over an employer sponsored plan into an IRA is not suitable for everyone. Tax implications, additional fees, and loan options may indicate an employer sponsored plan is more appropriate for some investors. Please consider all available options prior to making a decision.

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