Choosing the right IRA plan can be a challenge. Both the Roth IRA and Traditional IRA were designed to help investors save for retirement. Understanding the differences and choosing correctly between the two is the first step.
The Roth IRA
The Roth IRA was created by Congress in 1997. With a Roth IRA, you can make after-tax contributions. The deposits grow tax-deferred, and withdrawals are tax-free as long as these two conditions have been met:
You are at least 59 ½ years old
The funds have been in the account for at least 5 calendar years
The Roth IRA has no required minimum distribution. The money can stay in your account and can pass to beneficiaries without ever making a distribution, and then it will be tax-free to the beneficiaries. The Roth IRA is one of the greatest savings tools ever created by our government. However, there are income limitations. Your Beacon Financial Group advisor can help you determine if you are eligible for the Roth IRA.
The Traditional IRA
The Traditional IRA is the one that most people are familiar with because it has been around for over 40 years. In contrast to the Roth IRA, the Traditional IRA is very limited. People who make over a certain income or have employer-sponsored 401Ks or employer-sponsored retirement plans cannot make deductible IRA contributions. A Traditional IRA is:
Pre-taxed (under certain conditions)
Taxable when you make withdrawals (depending on how contribution was made)
The important thing to remember about Traditional IRAs is: when you reach the age of 70 ½ the IRS requires you to start making mandatory distributions. If the “required minimum distribution” (the “RMD”) is not met, there is a 50% penalty on the amount that should have been taken out.
For some of our clients, a combination of the two programs is the best way to plan - utilizing both IRAs when eligible for each particular program. There is a lot of information and material to cover. A Beacon Financial Group advisor can help you examine the options and secure your future.
Which type of IRA is best suited to meet your retirement needs?