You have heard of the
difference between a Regular Traditional IRA and a Roth IRA. The main difference is that with the older,
traditional IRA you can deduct from your taxes any contributions you make prior
to tax deadline. However, with the Roth
you cannot deduct any payments from your taxes.
So how do you decide which one to do?
First let’s look at some similarities and other differences.
Both forms of IRAs grow
tax-deferred. That’s a big advantage
over many financial instruments today that are taxed. You also have the same investment choices in
both types of IRAs. There are the same
contribution limits of $5,500 and an additional catch-up provision of $1,000 if
Age 50 and older. Keep in mind there are
also phase-out conditions if you earn over various income thresholds.
Yet there are many
differences. The biggest difference is
that when withdrawn all your income is tax-free. Huge advantage in a rising tax
environment. A Roth investor can also
make contributions past the Age 70 and ½, providing you have earned income.
Speaking of that magical number, there are no mandatory distributions at
age 70 and ½ like there is with a Traditional IRA.
There is no penalty for early withdrawals BUT keep in mind there is a 5
year holding period and one must be past age 50 and ½. Like the traditional IRA there are exceptions,
most notably $10,000 free withdrawal for first-time home buyers.
So which one? I’d consult with both a financial planner and
a CPA but if you need the deductions today, I’d opt-out for a Traditional
IRA. One can convert to a Roth later on
in years. There are many advantages to
both and both should be studied.
These comments are not made for any recommendations to choose one form of IRA over another.