by Peter Samuelson, WMSTM
An IRA or individual retirement account offers different tax advantages. Even if you are already contributing to your employer’s retirement plan it may be beneficial to also contribute to a Traditional or Roth IRA as well.
What is a Traditional IRA?
A Traditional IRA is a pre-tax account, meaning the money you contribute is income that you have not paid taxes on yet. This is beneficial because you may be able to deduct your contribution when you file your taxes, although there are certain caveats to this deduction. Currently, you are required to take an annual minimum distribution at age 72, but you can start withdrawing funds any time after age 59.5 without penalty in this account. Your age and birthday determine these minimum distributions. There are no income constraints when contributing to a Traditional IRA like there is with a Roth.
What is a Roth IRA?
A Roth IRA is an after-tax account, meaning you have already paid taxes on the money you contribute. This is beneficial for you because when you decide to take the money out in retirement you do not have to pay taxes on it. Just as with an IRA, for a Roth IRA, you must also have earned income to contribute, but unlike an IRA, income limits determine whether you can contribute to a Roth account. You do not have to take a required minimum distribution as you do with a Traditional IRA.
Let's talk about the contribution limits for either IRA. The maximum you can contribute in 2022 is $6,000 if you are under the age of 50 and you get an extra $1,000, for a total of $7,000 if you are 50 or older. You can split that money between the accounts any way you want if you have both, or you can put it all in one. We can help you strategize which will be more beneficial for you currently, and down the road as you approach retirement.
When deciding which individual retirement account is best for you, there are some key differences to keep in mind. We consider your current financial situation to determine which account will put you on the right path to accomplish your goals. Set up your complimentary consultation with one of us at Sawston so we can help figure out which strategy is best for you, and don’t forget to opt in and subscribe to our quarterly newsletter.