IRA vs. Roth IRA
First off, IRA stands for Individual Retirement Account, and they are typically set up to be used by an individual on their own, not through a company (though there are exceptions to this.)
But how do the two types of IRAs differ? And what are the benefits of each?
Here are 3 primary differences you should know about traditional IRAs and Roth IRAs:
Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution but are taxed at your income tax rate when you take the distribution, whereas Roth IRA are taxed as regular income when earned, and withdraws during retirement are tax-free.
If you withdraw from a traditional IRA before the age of 59 1/2, you will pay taxes + 10% penalty. Whereas Roth IRAs allow you to take withdraws equivalent to the amount of your contribution – tax and penalty free, for any reason, at any age.
RMDs – Required Minimum Distributions
Roth IRAs hold no RMDs for the actual account holder, but the beneficiary will have to take RMDs. Traditional IRAs however, require both the account owner and the beneficiary to take RMDs. For the account owner, that starts at the age of 73. For those turning 72 after 12/31/22 and 75 for those born in 1960 or after.
Depending on your specific situation and goals, both types of IRAs have their perks as well as their draw backs. We would love to speak to you in depth about how each one works and which is best suited for you. Call us today to schedule a phone call!
Source: Bill Good Marketing, Accessed 3/22/23