Roth IRA vs. Traditional IRA

ST. CROIX INSIGHTS

Roth IRA vs. Traditional IRA

BY BRETT ANDERSON/ST.CROIX ADVISORS, LLC

First off, pay now or pay later – that is the question. Ordinarily, when we discuss the difference, most individuals generally point out the fact that they’ll be in a lower tax bracket come retirement. In fact, I’m 99% confident that this is probably not the case for most of us. Remember, our government needs and wants your money. In short, a host of factors will ultimately decide your tax rate at retirement, the two biggest of which are health and lifestyle in your golden years. Although we can run the math a thousand ways, the biggest question to ask is: do you want all of your income in retirement taxed? Regularly, the answer is no.

 

Here’s a list of some of the differences between two of the most common retirement accounts: the Roth IRA and the Traditional IRA account. If you have specific questions, please don’t hesitate to give me a call.

 

Roth IRA vs. Traditional IRA

Roth IRA

  • Individual contributors must have taxable compensation (or a spouse with earned income if filing jointly) and contributions to a Roth are not subject to any age requirements or limitations.
  • Roth IRA contributions are not tax deductible and are also subject to adjusted gross income limitations.
  • Individuals may contribute up to $5,500 a year for those under 50. Those over 50 have an additional $1,000 catch up allowance per year (2016).
  • No minimum distribution requirements while the owner is alive and qualifying distributions are tax free. This is a great tax benefit in our retirement years.
  • Best practice is to have your money in the account for five years and until you reach age 59 ½, to enjoy distributions that are tax free. Otherwise, you may be subject to a 10% tax on the earnings.

Traditional IRA

  • Individual contributors must have earned income (or a spouse with earned income if filing jointly) and be younger than age 70.
  • Generally, Traditional IRA contributions are fully deductible. However, if either taxpayer or spouse is an active participant in an employer sponsored plan then adjusted gross income must be under IRS published thresholds.
  • Individuals may contribute up to $5,500 a year for those under 50. Those over 50 have an additional $1,000 catch up allowance per year (2016).
  • If distributions are taken prior to age 59 ½, taxable distributions are subject to 10% excise tax unless the taxpayer faces certain exception events such as death, disability, medical expenses, education, first-time homebuyer, and health insurance needs while unemployed.
  • At age 70 ½, you are required to begin making required minimum distributions, regardless of whether or not you need the funds.

Making a decision about your retirement savings can be difficult. Consulting with a skilled financial planner can help you make the best decisions for you situation. Call St. Croix Advisors at (651) 337-1919 or (877) 393-1919 or email at info@stcroixadvisors.com for more information.

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Ask yourself- can my portfolio support my lifestyle in my retirement? 

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