Traditional or Roth IRA?

It is never too early to start planning for your retirement. An Individual Retirement Account, or IRA, allows individuals to do just that by saving money for retirement in a tax-advantaged way.

An IRA is one of the most common retirement savings accounts. There are two main types of IRAs individuals choose from: Roth and Traditional.

The biggest difference between these two accounts is how and when individuals get a tax break. With Traditional IRAs, contributions made are tax-deductible, while withdrawals in retirement are taxable. Traditional IRAs allow you to use contributions to reduce your taxable income in the year that it was made. Contributions to Roth IRAs, however, are not tax-deductible, but the withdrawals in retirement are tax-free. With a Roth IRA, you receive no immediate tax benefit for contributing.

One of the most important differences to know about these two accounts is that a Roth IRA has a delayed tax benefit, while a traditional IRA has an upfront tax advantage. Bankrate puts it this way, “Retirement experts often recommend the Roth IRA [to individuals], but it's not always the better option, depending on your financial situation. The traditional IRA is a better choice when you're older or earning more, because you can avoid income taxes at higher rates on today's income.”

Roth IRA contributions can be withdrawn at any time without taxes or penalties, while Traditional IRA deductions can only be phased out and it all depends on an individual’s income. Additionally, the Traditional IRA will begin to require minimum distributions at the age of 72.

Both Traditional and Roth IRAs have a contribution limit that you may not exceed in a year. For 2023, the limit is $6,500 if you are under age 50 and $7,500 if you are over age 50.

There are many things to consider when planning for retirement, and it is never to early to begin thinking about implementing financial tools to aid in the process. A Traditional or Roth IRA is a good place to start, so that you can begin funding your retirement now. Although both can seem complicated for different reasons, there are numerous resources available to you to get the assistance needed in understanding what is best for your current situation.

At Coloramo, we do offer both types of IRA accounts for our members. Do you need help understanding these accounts or deciding which one could be best for you and your family? Come in or give us a call to speak with a financial expert today!