Traditional or Roth? How to choose the IRA type that’s right for you

With tax season just around the corner, I have to ask: Have you made your 2020 IRA contribution? You can do so until April 15th, so if you haven’t set anything aside yet, there’s still time.
 
If your answer to that question is “Why do I need an IRA?” then we need to chat.
 
IRA stands for Individual Retirement Account. An IRA is a retirement savings account that you own. Throughout your working life, you can make annual contributions (up to $6,000 if you are under the age of 50) to your IRA. When you retire, the IRA becomes a source of income for you as you take annual withdrawals – known as distributions – from  your account.
 
That’s a basic explanation but it should give you an idea of the process.
When you contact a financial institution to set up your IRA, they will ask you what type of account you’d like to set up. There are two basic types of IRAs:
  • A Traditional IRA allows you to get a tax break on the money you contribute each year, based on your modified adjusted gross income (or MAGI). Your savings grow tax-free over the span of your working years. Upon retirement, the distributions you take from your Traditional IRA are treated as income, so you pay income taxes on the money you withdraw each year.
  • A Roth IRA offers no upfront tax deduction, and your savings still grow tax-free over your working lifetime. However, the distributions you take from a Roth IRA when you retire are not subject to income tax, so long as you meet IRS requirements for withdrawals.
 If you expect to earn far less in retirement than you do in your working years, a Traditional IRA could make sense because the money you withdraw will be taxed at a much lower rate in the future than it would be today. If you expect your retirement income to be similar to what you earn today – or even greater – then a Roth IRA would be the better choice.
 
At RINO INVEST, our goal is to make sure that your retirement income is always going to be higher than your working income.  With this in mind, we highly encourage our clients to choose a Roth IRA. A Roth IRA prepares you for a comfortable retirement and provides you with a stream of tax-free income, so you are insulated from any future increases in federal tax rates.
 
As with all financial matters, be sure to do your homework first. A financial advisor can analyze your overall financial picture and help you choose the IRA that’s best for you. The IRS website has excellent and detailed information about every aspect of retirement savings.
 
Remember: your money isn’t going to save itself, so be sure to make your 2020 IRA contribution soon!
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