September 01st - 3 minutes to read

Traditional vs Roth IRA: What’s the Difference?

Learn about the types of IRAs so you can make smart decisions for retirement planning.

a financial advisor discussing IRAs
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The best time to start saving for retirement? As soon as possible. Even if you start small, it can greatly impact your future.

An individual retirement account is one way you can begin to save. There are two types: Traditional and Roth. Understanding the differences between Traditional vs Roth IRAs are essential to meeting your financial goals. Keep reading to learn about the differences between the two.

Understanding the Types of IRAs

No matter your life stage, it’s never too early to start retirement planning. Both types of IRAs offer unique tax benefits that can significantly impact your savings in the long run. To better understand your options, here’s an overview of their tax implications and benefits.

Traditional IRAs

A Traditional IRA allows you to contribute pre-tax dollars, decreasing your taxable income for the year. Investments in your account are tax-deferred, meaning you aren’t required to pay taxes on them until you withdraw them during retirement.

Roth IRAs

A Roth IRA allows you to make after-tax contributions. Unlike a Traditional IRA, contributions to a Roth IRA are not tax deductible. However, a big advantage is that the money in your account grows tax-free instead of tax-deferred, meaning you don’t have to pay taxes on them when you withdraw during retirement.

Roth vs Traditional IRA: Key Differences

The primary distinction between Roth vs Traditional IRAs lies in the tax treatment explained above. However, there are other differences as well. Here’s what you should know.

Early Withdrawal Rules

To enjoy penalty-free withdrawals from either type of account, you typically need to wait until you reach age 59 ½. If you withdraw money from a Traditional IRA before then, you’ll have to pay taxes and a 10% early withdrawal penalty. However, if you have a Roth IRA, you can avoid penalties if your withdrawal counts as a qualified distribution.

Required Minimum Distributions

RMDs are the minimum amount you must withdraw from your account yearly once you reach a certain age. For a Traditional IRA, this is typically around ages 72-75. On the other hand, Roth IRAs don’t mandate withdrawals during the account owner’s lifetime, meaning you can retain your savings and potentially pass them on to beneficiaries tax-free. Account beneficiaries may be subject to certain RMD rules, though.

Income and Contribution Limits

To be eligible for contributions to a Roth IRA, you must fall within a certain income level set by the IRS. On the other hand, there’s no income limit to contribute to a Traditional IRA.

Both types of IRAs also have annual contribution limits. Before you open your account and start making contributions, you should research these limits to see what they are for the current year.

Retirement Planning in Columbus, Ohio

Need advice on how to save for retirement? Royal Oak Financial Group has a team of experts ready to guide you to a solution that fits. We have over 20 years of experience serving individuals, families, and business owners with investment, retirement, tax planning, and more. Let us help you meet your financial goals! Contact us today to get started.