Saving for retirement is an important part of planning for your future. When it comes to putting money away, most people are choosing between the two main types of IRA, or Individual Retirement Account. The traditional IRA has long been the standard type of retirement savings account and it offers several advantages depending on your situation. The Roth IRA is an alternative that could be a smart choice in certain other cases. Both types offer you a way to secure and protect savings for your retirement, but your specific situation will determine which is better.
How and When Is It Taxed?
How taxes are taken out of your retirement savings is an important consideration when choosing between a traditional or a Roth IRA. With a traditional IRA, you can often get tax breaks by contributing to your retirement account before taxes are taken out of your paycheck, meaning that you aren’t paying taxes right now on that money. However, you will have to pay taxes on the money when you take it out of your account after retirement. This is a method of tax deferment. With a Roth IRA, there is no tax deferment, so it does not change your taxes right now. However, when you start withdrawing from the account, you will not have to pay taxes on the money since you already did. If you expect to be in a higher tax bracket after retirement, paying taxes on the money now with a Roth IRA is a better choice. If you expect to be in a lower tax bracket after you retire, deferring taxes till then is a better choice.
Limitations on Contributions
Both traditional and Roth IRAs limit how much you can contribute each year, and those limits usually increase slightly each year. For instance, in 2018, the contribution limit was $5500 if you’re under 50 and $6500 if you’re over 50. In 2019 it was $$6000 and $7000. The contribution limits are the same for both types of IRA. There is no age limit for contributing to a Roth IRA but you can only contribute to a traditional IRA till age 70 ½.
Limitations on Withdrawals
With a Roth IRA, you can withdraw your contributions at any time, but you can’t withdraw your earnings till you are at least 59 ½ and your account has been open for more than 5 years. There are no requirements for distributions with a Roth IRA. With a traditional IRA your withdrawals are taxed and there are penalties assessed if you make withdrawals before age 59 ½ or after age 70 ½. There are also minimum required distributions after you reach 70 ½ years.
Contact Bowman & Company Today
Bowman & Company CPA, PC provides all of our individual and small business customers with experienced, accurate, and affordable financial services. Our financial services aim to decrease your taxes and increase your net worth through responsible, timely, and accurate record keeping. We offer our services to clients throughout the Washington, D.C., metropolitan area, including Maryland and Baltimore County, Columbia, and Howard County. For more information on our offerings, contact us online or call us at (410) 381-8121. You can also find us on Twitter, Linkedin, Facebook, and Youtube.