There’s Still Time to Open an IRA – But Which Type is Right for You?
Published on October 15, 2013
Uh oh – we’re in the fourth quarter of the calendar year, it will soon be time to send your tax documents to your accountant . . . and you didn’t set up an IRA yet to start saving for retirement?
No worries – you have until April 15, 2014 to make a contribution that will apply to the 2013 tax year. But now—well, any time—is ripe for opening up an IRA.
Whether or not to select a Traditional or Roth IRA is a choice to make when opening a retirement account. There are benefits to each type of plan depending on the investor’s goals and situation. There are also certain restrictions around income, age, and other factors. Either one of these may be self-directed.
We always recommend that our clients consult their financial planner or tax professional about which type of retirement plan is best for their unique situation. You can also read about these plans at https://www.irs.gov/.
Here are some comparisons between Traditional and Roth IRAs for you to consider.
Traditional IRA 101
The Traditional IRA (individual retirement account) was created in 1975 by the federal government for those Americans who did not have pension plans through their employers, and because (even back then), Social Security was not providing enough income during retirement. Sound familiar?
The IRA education page of our website that explains “What is traditional IRA” lays out the basics about traditional IRAs; for example:
- The traditional IRA is an account that is used to save pre-tax dollars for use in retirement.
- The contributions made to this account are tax-deductible.
- The minimum age that account holders are allowed to start withdrawing money without penalty is 59½; withdrawals made prior to age 59½ are subject to an early withdrawal penalty in addition to taxes owed.
- Account holders must start withdrawing funds after reaching the age of 70½.
- Money grows tax-deferred while it is in the account. Taxes are only paid once money is withdrawn (distributions are taxed as ordinary income).
- You may not be able to deduct all of your contributions depending on your income or if you or your spouse is covered by an employer retirement plan.
- You may set up a traditional IRA and make contributions if you (or, if you file a joint tax return with your spouse) received taxable compensation during the year, and you are under the age of 70½.
Roth IRA 101
The Roth IRA was created in 1997 as part of the Taxpayer Relief Act; it was intended for the middle class to help save for retirement. Therefore, there are income criteria associated with who may open and contribute to a Roth IRA.
A big difference (there are a few) is that the money is taxed going into the account; the money generated by the investments in a Roth IRA is withdrawn tax-free. Another difference is that with a Roth IRA you are not required to ever withdraw the funds.
Here are some Roth IRA tips which we covered in a previous blog post:
- When money is taken out of the Roth IRA, funds up to the amount put into it are always federal-tax free; often the entirety of the funds are free from federal taxes.
- You may withdraw the basis (contribution amounts) anytime without penalty. Account holders may use these withdrawals to purchase a primary residence, cover medical expenses, or to help fund a child’s college education.
- Money invested is already taxed so any return you earn won’t be taxed if you wait to withdraw after five years and you have reached age 59 ½.
- There is no required age to withdraw from the account, and your beneficiary can inherit the account.
With a self-directed IRA, whether traditional or Roth, SEP or SIMPLE (for employers and the self-employed) individuals may invest in a broad range of assets, not only stocks, bonds and mutual funds but the many alternative investments allowed within a self-directed retirement plan. If you have any questions about these nontraditional assets, the types of retirement plans that are available, or wish to open a self-directed IRA, please contact us at (888) 857-8058 or Info@NextGenerationTrust.com; one of our helpful professionals will get you the answers right away.Back to Blog