Both these long-term investment tools are easy to set up. And, they both offer significant returns. However, they both have significant pros and cons. Nothing can substitute for a one-on-one conversation with a certified tax coach who understands more than your current financial profile. These professionals also understand your long-term needs and goals. All these things come into play when considering the type of IRA you need. There is no right or wrong answer as to whether a traditional IRA or a Roth IRA is better. Either one could be perfect in some situations and horrible in other situations. The government created traditional IRAs in 1974 as a way to partially privatize Social Security. About fifteen years later, Delaware Senator William Roth proposed a different type of IRA. Congress authorized the accounts which bear his name in 1997. Below is a brief side-by-side comparison of some important IRA features.
Category
Traditional IRA
Roth IRA
Contribution Tax Status
Contributions are tax-deductible for the tax year they are made. In this context, the tax years lasts until the day before Tax Day, which is usually April 14.
Contributors pay taxes on all deposits. So, there is no immediate tax advantage.
Withdrawal Tax Status
When account owners begin withdrawing account funds, this money is taxable at the owner’s current tax bracket.
All withdrawals are tax free, regardless of income level at the time. In other words, there is a delayed gratification element to Roth IRAs. Additionally, anyone who owns the IRA, and not just the original owner, may pull out tax-free money.
Contribution Income Limits
Generally, there is no income limit. All contributions are treated the same, no matter how much money the account owner earned.
Generally, individuals who earn more than $135,000 per year (as of 2018) cannot make Roth IRA contributions. This income limit usually goes up a little every year, but the increase is often negligible.
Withdrawal Mandatory Age
When account holders reach age 70 ½, they must begin withdrawing money.
No mandatory withdrawal age. This feature is a major plus for account owners who plan to pass their IRAs to children or grandchildren.
In a nutshell, if your IRA is primarily an individual savings vehicle, the traditional IRA may be a better option. On the other hand, if your IRA is primarily an inheritance vehicle (i.e. you plan to give the IRA to your heirs), the Roth IRA might be a good choice. Contact a certified tax coach near you to help you make sound decisions about your financial future.
The expertise of a Certified Tax Strategist is essential to reducing taxes and maximizing revenues and income for small business owners. Call our San Jose, San Jose tax consulting firm today at 408-293-8880 or request your free consultation online. As a gift for scheduling your consultation, we’ll give you our book, Writeoffs to the Rescue*.