Part of financial planning in San Antonio, Texas, requires crafting a retirement strategy that includes Individual Retirement Accounts to help you save for a secure, comfortable future. As Texas retirement planning professionals here at PAX, we understand there are various types of IRAs to choose from, and each one has varying requirements, options, eligibility, and benefits. This can be confusing, so it takes expert advice to help you choose the suitable choice.
We are here to help you understand the difference between traditional IRAs and Roth IRAs. Both have tax benefits, and in most cases, both should be a part of your retirement strategy.
When deciding between starting with a traditional IRA and a Roth IRA, it's essential to consider how current tax policies will impact each type of account. This article will help you understand the basics of:
- How Roth IRAs and traditional IRAs differ
- Eligibility of IRAs versus Roth IRAs
- The impact of taxes on both types of accounts
- How to select the right type of IRA for you
A lot of thought has to go into the strategy you use to maximize the accumulation and preservation of assets while minimizing the impact of taxes simultaneously.
What are the key similarities and differences between Roth IRAs and traditional IRAs?
A Roth IRA and traditional IRA are both tax-deferred retirement accounts that help you accumulate more assets inside the IRA. They're available to anyone with earned income and allow you to accumulate more assets for your golden years.
So why would you choose one over the other?
The answer lies in how much you'll get from each type of account when it is time to withdraw those funds (based on how they are taxed).
The traditional IRA provides multiple benefits.
A traditional IRA gives you the ability to accumulate more assets for retirement due to its favorable tax treatment:
- The contributions to a traditional IRA are tax-deductible, making them pre-tax.
- Earnings (appreciation and income) inside the traditional IRA are not taxable.
- Withdrawals of contributions, appreciation, and income are taxable as ordinary income when you start taking distributions.
- There is a penalty if you begin taking withdrawals before age 59½.
- You are required to start taking distributions at 70½.
- There is another benefit if your tax rate during retirement is lower than your tax rate during your working years. Distributions are taxed at a lower rate.
- The 2022 annual IRA contribution limit is $6,000 (plus $1,000 if you are age 50 or higher).
The Roth IRA is similar to the traditional IRA, but there are some important differences, primarily based on the current tax code.
A Roth IRA also gives you the ability to accumulate additional assets for retirement due to its favorable tax treatment:
- One key difference is you are contributing after-tax dollars into your Roth IRA.
- Income and appreciation accumulate tax-free inside the Roth IRA (similar to a traditional IRA).
- The contributions made to Roth IRAs can be distributed tax-free (they have already been taxed).
- Distributions of appreciation and income are taxable.
- Penalties apply for early withdrawals.
- Roth IRAs also allow you to take tax-free withdrawals of your contributions (but not earnings) at any time.
- The Roth IRA has a 2022 contribution limit of $6,000 (plus a $1,000 catch-up allowance for people over age 50).
- Because there are restrictions, some people decide to do a Roth conversion.
We recommend discussing your eligibility requirements, based on income and other considerations, with a financial advisor in San Antonio at PAX.
Check your IRA eligibility to see if you are eligible to contribute to a Roth.
You can contribute the full amount in 2022 if you are single and your MAGI is below $129,000. If you earn more, your max contribution decreases as your MAGI rises to the max of $144,000. If you are married/filing jointly, your limits increase to $204,000 and $214,000.
Your tax bracket will determine which IRA is better for you
Believe it or not, your income is part of this tax-savings strategy! If your current tax rate is lower than what it will be in retirement, a Roth IRA might save you money. However, a traditional IRA could save you more money if your current tax rate is higher than what it will be in retirement.
The IRS has announced retirement plan changes for 2022, so it’s essential to know them and stay compliant. If it’s all too much to digest or consider, give our team of Texas retirement planning professionals at PAX a call to help you make the right decisions for your golden years. That’s what we’re here for—explore PIVOT RETIREMENT PLANNING™ with us!
Why does the Roth IRA work for most people saving for retirement?
If you’re in a higher tax bracket now than you expect to be after you exit the workforce, then the Roth IRA or a traditional IRA may work well for your retirement savings strategy. Both pre-tax and after-tax contribution strategies work better when your tax rates are lower.
Be aware there are no minimum distribution requirements for a Roth IRA, so it is possible that the account could continue accumulating assets after the required distribution rates that apply to traditional IRAs.
And there are zero age restrictions on distributions or contributions from a Roth IRA, which makes it unique compared to other retirement accounts.
Work with a financial advisor at PAX to select a traditional or Roth IRA
Now that you know more about the nuances that define traditional and Roth IRAs, you may want to know which one is best for your situation and goals. An experienced financial advisor at PAX can provide the answers and help you develop a personal strategy for asset accumulation and distribution. PAX advisors have the specialized knowledge to help you make the right financial decisions for you and your family.
Before choosing a Texas financial advisor, take the time to find the right fiduciary advisor with the right background to help you grow and protect your wealth.
If you want to accumulate more assets for retirement and have questions about traditional or Roth IRAs, we recommend contacting the experts at PAX Financial. Our financial advisors in San Antonio, Texas, look forward to helping you decide which strategy is best for your situation. Schedule a no-obligation conversation with our team today!
Leave the guesswork out of retirement planning and tax planning in San Antonio, TX. PAX provides more than 100 years of combined experience helping busy people like you organize your financial life.
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