Traditional or Roth IRA

Individuals have many options when saving for retirement. What type of account to contribute depends on your financial situation and what is most important to you.

If you qualify, you can contribute to a Traditional or Roth IRA. Each one has different benefits and tax advantages for the contributor.

Tax Treatment

Traditional IRA: Contributions to a Traditional IRA can be made with pre-tax dollars, reducing your taxable income for the year you contribute. Withdrawals are taxed as ordinary income, which means you will pay taxes years later on the growth of your contributions. 1

Roth IRA: Contributions to a Roth IRA are made with post-tax dollars and do not reduce your taxable income in the year you contribute. The advantage is that withdrawals are tax-free, provided certain conditions are met.1

How do you decide which one is right for you?

Consider your current tax bracket. The higher your tax bracket, the more significant the potential tax savings for a traditional IRA contribution. The second thing to consider is how long the money will be in the account until withdrawal. The longer time frames favor the Roth IRA, as making up the forgone current-year tax savings from the traditional IRA contributions takes time.

One strategy is to make Roth IRA contributions when you are younger and typically earn less than you do at the middle and end of your career. You obviously would also have a long time until retirement. You can change to traditional IRA contributions as you progress in your career.

Be aware of the Rules.

Before contributing to or withdrawing from an IRA, you should consider the many rules. For a complete list of the regulations, see IRA Publication 590 A and B.  

Contribution Limits

The contribution limit for Traditional and Roth IRAs in 2024 is $7,000 or $8,000 if you are 50 or older. However, your income level may limit your ability to contribute to a Roth IRA. The limits are totals, so that is the combined total if you consider contributing to both. 2

Income Eligibility

Traditional IRA: There are no income limits for contributing to a Traditional IRA. However, the deductibility of your contributions may be limited if an employer-sponsored retirement plan covers you or your spouse and your income exceeds certain thresholds.1

Roth IRA: Your ability to contribute to a Roth IRA is phased out at higher income levels. For 2024, the phase-out range for single filers is $146,000 to $161,000; for married couples filing jointly, it is $230,000 to $240,000.2

Withdrawal Rules

Traditional IRA: Withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty and taxed as ordinary income. Some exceptions exist, such as first-time home purchases or higher education expenses.3

Roth IRA: Contributions can be withdrawn anytime without taxes or penalties. However, earnings withdrawn before age 59½ may be subject to taxes and penalties unless certain conditions are met.3

Another difference between the Traditional IRA and the Roth IRA is that the Traditional IRA has a mandatory distribution known as the Required Minimum Distribution (RMD). Depending on the year you were born, the RMD age is either 73 or 75.2, 3   

Consider engaging the services of a Certified Financial Planner (CFP) to model different contribution strategies for retirement savings. The potential tax savings can be significant at retirement.

For comprehensive tax and retirement planning, contact Ron Taraborrelli at,

Phone 856 562 8800

Sources:

1.      IRS Publication 590-A

2.      IRS.gov

3.      IRA Publication 590-B

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities.

The information in this material is not intended as tax or legal advice. Synergy Wealth Management does not provide tax or legal advice. Please consult legal or tax professionals for specific information regarding your situation.