When it comes to retirement, one of the most common vehicles is an IRA (individual retirement account). Most large employers will offer some form of IRA, and many will give you options for different kinds. Even if you don’t get retirement through your job, you can set up an IRA with a financial advisor and get the same benefits. So what are the types of IRA and what are the differences? Read on, we’ve got you covered!
Here are Five Fast Facts about IRAs:
- ✌The Big Two - There are a bunch of different kinds of IRAs, but the two that affect most workers are Traditional and Roth. Those are the ones we’ll focus on here.
- 💸 The Big Difference - The key difference between these two types of IRA is when you get taxed on the money you put in. The Traditional IRA is pre-tax, meaning you put your money in before paying income tax on it; for the Roth, you pay income tax before the money goes in. Now or later, Uncle Sam always gets his cut!
- 💰 Your Contribution - Both have a max of $7,000 in contributions for 2024 (it can change each year). If you are 50 years old or older, your max is $8,000 to allow you to “catch up” a bit. Roth IRAs have income limits, so if you make more than a certain income (again, it depends on the year, as well as married status), you can’t contribute anymore. This is not a tax shelter, you know. Remember Uncle Sam…
- ☝️ Gimme My Money Back - You can take money out of a Traditional IRA without penalties once you’re 59 ½ years old. Since your contributions are pre-tax, you will pay taxes on that money when it comes out. You are required to take a yearly withdrawal once you turn 73 years old. Taking money out of a Roth IRA is penalty- and tax-free after age 59 ½, and there are never any required distributions.
- 😡 Possible Penalties - If you take money out of a Traditional IRA before 59 ½, you’ll get slapped with a 10% withdrawal penalty. There are some exceptions for things like first time homebuyer expenses, certain medical expenses, or some higher education expenses.
🔥Bottom line: So which is the right one for you? There are several considerations, but for most folks the biggest thing to think about is if you expect to be in a higher tax bracket when you take money out for retirement than you are now. If so, then you would be better off using the Roth since you’ll pay less tax now than you would in the future. Check with your tax advisor to get some expert advice before you pull the trigger.
What’s your best retirement advice?
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