Pre-Tax vs. Post-Tax Power: Choosing the Right IRA for You

Julia Carlson |
Categories
IRA
Retirement

Individual Retirement Accounts (IRAs) are powerful tools to help you work toward your retirement goals but selecting the right IRA type requires careful consideration of your tax situation and retirement goals. There are two main types of IRAs: Traditional and Roth. Here is a breakdown of their key differences to help guide your decision:

Tax Treatment

  • Traditional IRA: Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
  • Roth IRA: A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Income Limits

  • Traditional IRA: There are no income limits for contributors.
  • Roth IRA: There are income limits for Roth IRA contributors. You may not be eligible to contribute the full amount, or at all, depending on your income and filing status.

2024 Contributions Limits

  • Traditional IRA & Roth IRA: The maximum total contributions to all your IRAs for the year are $7,000 if you are under 50 and $8,000 if you are over 50.

Required Minimum Distributions (RMDs)

  • Traditional IRAs: RMDs start at age 73 under current law, forcing you to withdraw a minimum amount each year, which can push you into a higher tax bracket.
  • Roth IRAs: There are no RMDs while the original owner is alive.

Who Should Choose Which?

  • Traditional IRA: This might be ideal if you're in a higher tax bracket now and expect to be in a lower one in retirement. It offers upfront tax savings that can boost your contributions.
  • Roth IRA: This could be a good fit if you're in a lower tax bracket now and expect your income (and potentially tax bracket) to rise in retirement. You'll enjoy tax-free growth and withdrawals, potentially saving a significant amount over time.

The Bottom Line

There's no one-size-fits-all answer. Consider your current tax situation, future income expectations, and retirement goals. Consulting with a financial advisor and tax preparer can help you make an informed decision for a secure and tax-efficient retirement.

Information in this material is for general information only and not intended as investment, tax, or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.

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