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Difference between Traditional IRA and Roth IRA

Difference between Traditional IRA and Roth IRA

There are many different types of individual retirement accounts, or IRAs, available to consumers. Two of the most popular are the traditional IRA and the Roth IRA. Both have their pros and cons, but it can be difficult to decide which is right for you. In this blog post, we will outline the key differences between these two types of IRAs so that you can make an informed decision about which is best for your unique financial situation.

What is Traditional IRA?

Traditional IRA is a retirement savings account that offers tax-deferred growth potential and accepts tax-deductible contributions. Traditional IRAs are typically used by people who are employed and looking to save for retirement. The money in a Traditional IRA can be invested in a variety of assets, including stocks, bonds, and mutual funds. Traditional IRA holders pay taxes on their withdrawals at retirement, when they are typically in a lower tax bracket than during their working years. Traditional IRAs also have Required Minimum Distributions (RMDs), which dictate how much must be withdrawn from the account each year beginning at age 72. Traditional IRAs offer many benefits, but it’s important to understand the rules and requirements before opening an account.

What is Roth IRA?

Roth IRA is a popular retirement savings account that offers tax-free growth and tax-free withdrawals in retirement. That said, there are eligibility requirements and contribution limits to be aware of. Roth IRA contributions are made with after-tax dollars, which means they have already been taxed. This is different from a traditional IRA, where contributions are made with pre-tax dollars and are taxed when withdrawn in retirement. Roth IRA withdrawals are only tax-free if they meet certain conditions, such as being made after age 59½ or due to disability or death.

Roth IRA contribution limits for 2020 are $6,000 for those under age 50 and $7,000 for those age 50 and older. Eligibility for a Roth IRA is based on income, and there are phaseouts for Roth IRA contributions once income reaches certain levels. For example, the Roth IRA contribution limit for single filers starts to phase out at $124,000 in 2020 and is completely phased out at $139,000. Roth IRAs can be a great way to save for retirement, but it’s important to understand the rules before opening an account.

Difference between Traditional IRA and Roth IRA

Traditional IRA and Roth IRA are two types of retirement accounts that offer different tax advantages. Traditional IRA allows you to deduct your contribution from your taxes, while Roth IRA allows you to withdraw your money tax-free in retirement. Traditional IRAs are best for people who expect to be in a lower tax bracket in retirement, while Roth IRAs are best for people who expect to be in a higher tax bracket in retirement.

However, both Traditional IRA and Roth IRA have income limits, meaning that you can only contribute if your income is below a certain amount. Traditional IRA also has mandatory distribution rules, meaning that you must start taking withdrawals at age 70 1/2. Roth IRA does not have mandatory distribution rules, meaning that you can leave the money in the account to grow tax-free for as long as you want.

Conclusion

The main difference between a Traditional IRA and Roth IRA is when you pay taxes on the contributions and withdrawals. With a Traditional IRA, you pay taxes on your contributions when you make them, but not on your withdrawals in retirement. With a Roth IRA, you pay taxes on your contributions when you make them, but you don’t have to pay any taxes on your withdrawals in retirement. There are other differences as well, like how much money you can contribute each year and whether or not your spouse can contribute if they have a job.

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