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Traditional IRA vs ROTH IRA

What's the Difference?

So, you're considering investing in an IRA as a way to save for retirement. Great! But which is better: a Traditional IRA or a Roth IRA? Read on to learn about some of the differences between the two. Still unsure? Consulting a financial advisor is always a good idea; I'd love to discuss all your options with you.

Heartland Wealth Management

3351 W. Rock Creek Road, Suite 130

Norman, OK 73072

561.7051

What's the difference Traditional IRA vs Roth IRA?

When you're comparing IRAs, there are three major actions to consider: Contributions, Accumulation and Distributions.

Contributions in Traditional IRAs are tax-deductible in the year made, while there are no tax deductions for contributions for Roth IRAs. This is often why people prefer Traditional IRAs.

The second action is accumulation. Accumulation of earnings in both Traditional and Roth are not taxed while inside of the account. This allows for your investments to remain untaxed as long as it stays invested. Since both accounts share the tax deferral, there is no advantage for either account type.

The last action is the distribution from the IRA. For traditional IRAs, this is where taxes play its role. Distributions made from Traditional IRAs are fully taxed as ordinary income, while distributions from Roth IRAs are distributed tax free.

The easiest way to think about is, Traditional IRAs give you the tax benefits for the money in, or the money you are earning now, while the Roth IRA gives you tax benefits on the money coming out, or your future money.

What can I contribute?

The 2021 combined annual contribution limit for Roth and Traditional IRAs is $6,000 ($7,000 if you're age 50 or older)—unchanged from 2020.

Roth IRA contribution limits are reduced or eliminated at higher incomes.

Traditional IRA contributions are deductible, but the amount you can deduct may be reduced or eliminated if you or your spouse is covered by a retirement plan at work.

Lower-income taxpayers may be eligible for the “saver's credit” if they contribute to an IRA.

Other investment options?

IRAs are excellent vehicles to save for retirement. But to take full advantage of these accounts and avoid any trouble or penalties, be sure to follow the contribution limits, income rules and deduction limits. Due to these complexities, it may be best to contact a financial advisor to ensure you're maximizing your IRA.


 

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