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Should I invest in a Roth IRA or a traditional IRA?

Jayne W. Di Vincenzo, President, Fiduciary EDGE Advisors—Jayne@Fid-Edge.com

Individual retirement accounts are a great way to save for retirement, and it's worth knowing about the two most common types and their differences: traditional IRAs and Roth IRAs.

Both provide generous tax breaks, but this post will focus on their differences in hopes of helping you decide which one makes more sense for you.

Speaking of those tax breaks, traditional IRA contributions are tax deductible for many taxpayers during the years they are made. You are able to defer paying taxes on your gains and principle until the years you make withdrawals.  

ROTH IRAs were created by the Taxpayer Relief Act of 1997 and are named for Senator William Roth.   With Roth IRAs, you don't get the tax break when you make contributions. You pay income taxes on what you contribute (referred to as “after-tax contributions”), but not when you withdraw money—potentially allowing it to grow tax-free for decades!  

Another big difference is only Roth IRAs have income-eligibility restrictions. For singles in 2020, it's $139,000. For married couples, $206,000. Anyone, even a billionaire, with earned income can contribute to a traditional IRA. You can now make contributions to traditional IRAs beyond the previous age limit of 70½ years, thanks to the SECURE Act. There is no age restriction for opening a new, traditional IRA as long as you fund it via a rollover or transfer from an eligible retirement account. 

At 70 1/2, those with traditional IRAs must begin withdrawing, whether or not you want to or need the money. With a ROTH, you withdraw when you want to, or not all. If you leave your ROTH IRA to a survivor, your beneficiary also won't pay taxes on withdrawals, but he must make withdrawals or roll it over into an IRA of his own within five years.  (does this also apply to a SPOUSE??)

Another attractive feature of the ROTH is you can withdraw money from it at any time, including before retirement, and not pay a penalty or taxes on the principle. If you're saving in a traditional IRA and you withdraw money from it before age 59 1/2, you must pay a 10-percent penalty (there are a few exceptions to the penalty), plus income taxes on the amount withdrawn.  

There's a lot more to know about both of IRA options, so contact Fiduciary EDGE Advisors info@FiduciaryEDGEAdv.com or 888-605-3343 to learn more.