Sunday, January 22, 2017

A Roth vs. Traditional IRA

Sometimes, we fail to do something that's good for us because we don't totally understand our choices.  We get frustrated and fail to do anything at all.  Retirement savings can be one of those areas.  If you are saving for retirement in any vehicle at all, I applaud you for taking a fabulous first step.  If you haven't started, or want to be sure you are using the best account for you, read on.

Both Traditional IRA's and Roth IRA's are pretty fabulous tools if you know how to use them well.  I personally think that a Roth IRA is one of the best retirement tools out there if you qualify for one because it when you retire, and take the money out, you will have already paid the taxes!  That being said, a  Traditional IRA also has a few benefits that might want to utilize...  Take a look at the following chart  that highlights the pros and cons of both!

Traditional IRA
Roth IRA
Pro:
  • Can save you money on the current year's taxes.
  • Earnings can grown tax-deferred
  • You can save up to $5500 if you are under 50 in this investment vehicle in 2016 (the per year contribution amount is changed periodically by the IRS).
  • If you are over 50, you can contribute an extra $1000 (annually).
  • You can use this no matter how much money you earn (as long as you have earned income, there is no ceiling)! 
  • Qualify for the retirement savings credit as well (form 8880).
  • Contribute for the previous tax year all the way until Tax Day (April 18th this year). 









Con:
  • You cannot contribute money after you turn 70 1/2.
  • You are required to start taking money out by the time you are 70 1/2.
  • You will pay taxes when you start taking the  money out.
  • You must have earned income to use this type of account. 



 Pro:
  • Earnings grow tax-free.
  • You can save up to $5500 if you are under 50 in this investment vehicle in 2016 (again, note that the IRS periodically adjusts this dollar amount).
  • If you are over 50, you can contribute an extra $1000 (annually).
  • You are not ever required to take the money out (as a distribution).  This means that you could leave this money to your heirs if you don't need it.
  • Qualified distributions are tax free.  You will already have paid taxes on the contributions, so you won't owe that money later in life.
  • In an emergency, you could take out the money you contributed without paying any penalty.
  • No age limits for contributions.  If you still have earned income, you can still contribute even after the age of 70 1/2.
  • Qualify for the retirement savings credit as well (form 8880).
  • Contribute for the previous tax year all the way until Tax Day (April 18th this year). 


Con:
  • Income limitations apply in order to be eligible to take advantage of this account.   In 2016, for single filers it's a MAGI (modified adjusted gross income) of $117,000 and married $184,000.  There are other "phaseout" dollar figures.  If your income is close to these amounts, talk to your tax pro to see if you can use this account.
  • You are paying taxes on this money now.
  • This will not lower your taxable income on this year's taxes (however you can still take the retirement savings tax credit-form 8880).
  • You must have earned income to use this account.


A few notes to consider:

  • If you are a married couple, and one of you does not have earned income but the other does, you can do what is considered a "spousal" contribution.  So, you can still fully fund an IRA.  if you fall into this category, ask your tax pro to help you with this.
  • If you make less than $5500 in earned income (from a job) you can only contribute up to the amount you earned working.
  • If you "make too much" for a Roth IRA, you might still be able to contribute to a Roth via a "conversion".  This is a slightly newer strategy, and somewhat tricky. If this is something you want to try to do, talk to a tax pro so that you can get help and advice that is specific to your situation.

No comments:

Post a Comment