Tax Benefits of Both the Roth IRA and Traditional IRA
Retirement is a major issue for many Americans.
What will happen when I stop working? Will I be able to feed myself or take care of medical emergencies?
It’s a topic that every generation must deal with, yet each successive generation seems to ignore it. Indeed, retirement is one of the most important things to plan for if you want to lead a financially stable life. It will provide you with comfort and solidarity when you reach a ripe age of wisdom, and you will thank yourself for having stocked away funds so responsibly.
With that said, what are the most basic retirement funds? The government provides a small sum for social security, but savvy investors know better than to rely on such capricious means to secure their future. The time-tested methods of investing in a Roth IRA or a traditional IRA have boded well for many Americans. As such, a tax-deductible, interest-yielding IRA account should be the cornerstone of every investor’s financial strategy. Let’s discuss some of their features.
Age and Income Limits
Anyone who is younger than 70 can contribute to either a traditional IRA or a Roth IRA; however, anyone who falls above that age can only contribute to a Roth IRA.
A single person with a modified adjusted gross income of less than $133k can make contributions to a Roth IRA, while couples must have less than $196k when filing jointly. Modified adjusted gross income is defined as your households adjusted gross income plus any tax-deductible exemptions – meaning: your take-home income with any applicable tax deductions added in.
The withdrawal rules can be a little muddling. Let’s clear some of them up. If you choose to make a withdrawal on any of your initial contributions to a Roth IRA before you reach age 59, you will not be taxed on the contribution amount; however, if you withdraw any of the earned interest before age 59, then you will be obligated to pay the regular earned income tax rate plus a 10% federal tax penalty for the year in which you made the withdrawal – if you are over age 59 and have held the account for more than 5 years, then you will not pay any taxes on your earned interest. In the case of a traditional IRA, you will pay regular income taxes plus a 10% federal tax penalty for the year in which you made the withdrawal no matter when you withdraw – whether it be your initial contribution or your earned interest.
Both traditional and Roth IRAs provide some very enticing tax breaks. The difference lies in when these tax breaks occur. With a traditional IRA, you will receive a tax deduction when you deposit money into the account and subsequently pay taxes (ordinary state and federal income tax rates) on earned income when you make withdrawals during retirement. With a Roth IRA, you will avoid being taxed upon retirement when you make withdrawals, but, instead, receive no federal or state tax break for each contribution you initially make. The interest earned on both accounts is tax-free.
Understand your taxes and prepare for your future today.