With an individual retirement account (IRA), you can save for your retirement while also saving on your taxes. If you are self-employed or simply looking to open another retirement account, you may want to consider a traditional or Roth IRA. Before you can decide which one is right for you, you must first understand what they offer. Consider the differences between them and the pros and cons of both.
What Is a Traditional IRA vs. a Roth IRA?
When you have a traditional IRA, you make contributions with pre-tax money. While you’ll have to pay taxes on your distributions after age 59 ½, your contributions may be tax deductible.
With a Roth IRA, you make contributions with after-tax money, which means your contributions to a Roth IRA are not tax-deductible. However, since you’ve already paid taxes on your contributions, your distributions after age 59 ½ won’t have any taxes or penalties.
Pros and Cons of Traditional IRAs vs. Roth IRAs
To choose which is the right IRA for you, consider the pros and cons of each.
Traditional IRA
The main advantage of a traditional IRA is that you can deduct your contributions today and pay taxes when you make future withdrawals. In some financial situations, this may be more advantageous. For example, your contributions might lower your adjusted gross income (AGI) enough to qualify you for other tax incentives.
Traditional IRAs also come with restrictions that might make them less advantageous. In addition to the standard taxes, there will be an extra 10% tax on any distributions you take before age 59 ½. You will also have required minimum distributions (RMDs) after you reach a certain age.
Roth IRA
The advantages of choosing a Roth IRA include the following:
- Lack of age limits on contributions
- Tax-free withdrawals beginning at age 59 ½
- Qualified hardship and education withdrawals
- No RMDs during your lifetime
- Penalty-free withdrawals on a certain amount of first-time homebuyer costs
- Penalty- and tax-free withdrawals on contributions plus principal after five years
The disadvantages of choosing a Roth IRA include the following:
- Contributions are not tax-deductible.
- Eligibility is determined by income level.
Overall, Roth IRAs tend to have fewer restrictions but also fewer tax breaks than traditional IRAs.
Traditional IRA vs. Roth IRA Contribution Limits
The current IRA contribution limit is $6,500 per year. This annual contribution limit applies to both traditional and Roth IRAs. Individuals who are at least 50 can also make additional catch-up contributions for a total of up to $1,000.
Factors to Consider Before Opening a Traditional or Roth IRA
When choosing a Roth IRA vs. a traditional IRA, you will want to consider your eligibility, future income and future income tax bracket.
Though gross income typically declines in retirement, your taxable income may not. Compare your salary to what you’ll receive in Social Security benefits and income from investments. If you anticipate being in a higher tax bracket after you retire, a Roth IRA may be the right choice for you. If you believe you’ll have less taxable income when you begin taking distributions, you may want to choose a traditional IRA instead.
Whichever you choose, we recommend opening a self-directed IRA. Both traditional and Roth IRAs can be self-directed. With either a self-directed traditional IRA or a self-directed Roth IRA, you’ll be able to invest in both conventional and alternative assets, including stocks, mutual funds, real estate, cryptocurrency and precious metals.
Fill Out an Application to Open an IRA With Accuplan
With a self-directed IRA, you can invest in alternative assets, including gold, cryptocurrency, real estate and private equity. When you’re ready to invest in the retirement you want, Accuplan can help.
We have years of experience with the rules you must follow for retirement account investing. We provide guidance to help you understand the regulations and rules for alternative investments.
If you are tired of the investment limits of traditional retirement accounts, fill out an application to open a self-directed IRA with us at Accuplan.
Our content should not be relied on for investment advice but simply for informational or educational purposes only. Our information is not meant to provide, nor should it be depended on for advice regarding investment, tax, legal or accounting concerns.