by Grace Bohall, CPA
Retirement… something that most of us want and many of us are unprepared for. Retirement planning can be overwhelming with so many different options out there. For simplicity, I am going to outline some of the differences between a Roth IRA and a traditional IRA.
You can contribute for 2016 and 2017 up to $5,500 or $6,500 if you are over 50 each year for either a Roth IRA or a traditional IRA. You must have earned income to contribute to your IRA. One of the main differences between a Roth IRA and Traditional IRA is that a traditional IRA is tax deductible for federal and state income tax in the you make the contribution assuming your income doesn’t go over the income thresholds; whereas, a Roth IRA is not tax deductible. When you start taking money out for retirement through your ROTH IRA, withdrawals are not taxable, whereas money you take out of your traditional IRA is taxed at your ordinary rate. When deciding which IRA type to contribute to you should compare what your tax rate is now, compared to what you expect it to be in retirement, and whether you want to save the tax dollars now or in retirement.
There are several other differences in the Roth verses the traditional IRA. Traditional IRA’s have a required minimum distribution that must be taken out every year when you turn 70 ½, whereas Roth IRA’s do not have this requirement.
In the event you should need money from your retirement funds for unqualified purposes before you turn 59 1/2, Roth IRA’s come with less penalties. If you take funds out of your traditional IRA, you must pay tax on the distribution at your ordinary tax rate and a 10% penalty on top of that; whereas with a Roth you can take out principle at no tax or penalty. Only earnings in your ROTH are taxed and penalized if removed. I don’t recommend taking money out of your retirement account, but sometimes things happen.
There are a few other considerations to consider, contact your financial planner or accountant for further information.