IRA vs. Roth IRA - what's the difference?
A traditional IRA and a Roth IRA have many similarities with the biggest difference being how they are taxed. Both a traditional and Roth IRA are retirement savings accounts that allow an annual contribution, up to federal limits, that grows and can be withdrawn once you reach 59.5 years of age. They each incur a 10% penalty for withdrawing before 59.5 with a few exceptions such as a first-time home purchase, disability, or qualified education expenses.
A contribution to a traditional IRA is made using pre-tax dollars and the money grows tax deferred until you reach retirement. For a Roth, you contribute using after tax dollars, but the money grows tax free. Once you've reached 59.5 you may begin withdrawing from either account, however a traditional IRA requires you to take a distribution (required minimum distribution, RMD) in the year you turn 70.5 and each year after while the Roth IRA doesn't and allows you to keep the money growing tax free.
Whether you contribute to a Roth or traditional IRA depends on the current as well as projected tax bracket of the filer in retirement. Both can play an important role in saving for retirement and a financial professional can help you determine the best strategy to optimize retirement savings and minimize the tax liability.
To learn more IRA differences and strategies for using them, or about other investment fundamentals, contact Financial Investment Team at 503-906-5205
Investment advisory services offered through Financial Investment Team, Inc., an investment adviser registered with the state of Oregon. Securities offered through Peak Brokerage Services, LLC. Member FINRA/SIPC. Financial Investment Team, Inc. is a separate and independent entity from Peak Brokerage Services, LLC.
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