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Traditional IRA vs Roth IRA

Traditional IRA vs Roth IRA

May 30, 2024

Understanding the Basics

 

History of Traditional IRA vs Roth IRA -

In 1974 Congress passed ERISA ( Employee Retirement Income Security Act) which would become the precursor to today’s TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA). . Originally offered exclusively through banks to provide a vehicle for retirement savings for employees whose company did not provide a pension plan, IRAs grew in popularity over time and in 1981 the balance in IRA accounts exceed 4.8 billion dollars! Today, Contributions to IRA are open to anyone under the age of 70.5 years of age, with income limits as determined by Congress as to whether the contributions are deductible, or not from your income.

The Roth IRA has an interesting history. Originally proposed by Senators Bob Packwood of Oregon and William Roth of Delaware, it was initially called an “IRA Plus.” The idea behind the Roth IRA was to allow individuals to invest up to $2,000 in an account with no immediate tax deductions. Both types of IRAS were designed to help employees save for retirement. The ROTH IRA didn’t become a retirement vehicle until 1997.

 

TRADITIONAL IRA-

With a Tradition IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.  Using PRE Tax Dollars allows you to deduct from your income the amount of contribution. Example- You earn $75,000 in a year and contribute $5,000 to your Traditional IRA. For that tax year you will deduct $5,000 from your income and be taxed on $70,000. The earnings or gain in a Traditional balance grows tax deferred ( meaning you do not pay tax on any gains) which helps the account balance grow over time. Once you attain the age of 59.5 you can take money out of your IRA, but you will have to pay ordinary income tax on any amount you withdraw.

 

ROTH IRA-

With a ROTH IRA, you contribute after tax or post tax dollars, your money grows tax-deferred and qualified withdrawals are NOT taxed as income. Deferring to a ROTH IRA does not afford you the income tax deduction like the TRAD IRA does, however, when you take money out of your ROTH IRA there are no taxes to pay! There are all types of rules so be sure to ask your accountant and CPA what those rules are and how the rules apply to you! You can also find the rules at IRS.gov. 

 

Which IRA is Best?

Weyers McKeever Financial Partners and our team can assist, with help from your CPA in determining which of these retirement savings vehicles makes the most sense for your specific situation. No matter what stage of life you're in, it is never too soon to start planning for retirement, as even the small decisions you make today can have a big impact on your future. Additionally, as you get closer to “pulling the ripcord” on your retirement, understanding the tax implications of your various accounts will help us design your income plan that best suits the lifestyle you have been dreaming about.

 

Conclusion-

Tax status of contributions and distributions is the big difference between a TRAD IRA and a ROTH IRA. Would it be best to take the deduction today (Traditional IRA) or to have income tax free income later?

Weyers McKeever can help you answer that important question, and the decision will be one of the most important decisions you can make as you prepare for your Retirement!! Be part of a Team, the Weyers McKeever Financial Partners Team.

 

Scott McKeever is a registered representative and investment adviser representative of, and securities and investment advisory services are offered solely by Equity Services, Inc. [ESI], known as Vermont Equity Services in WI, NH, CO & MO,  Member FINRA/SIPC, 1 N. Franklin Street, Suite 3450, Chicago, IL  60606. PH: 312-236-2500. Weyers McKeever Financial Partners is independent of ESI. Representatives of ESI do not offer tax or legal advice.

 

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