Understanding IRAs

Understanding IRAs

An IRA (Individual Retirement Account) is something everyone should think about as they enter the workforce. Before you open an IRA, you want to be knowledgeable about the choices you have. There are two different kinds of IRAs: Traditional and Roth. Here’s what you need to know about each of them:

Traditional IRA - The traditional IRA allows you to defer taxes on the earnings on your contributions until they are withdrawn. Also, depending on eligibility, contributions are tax deductible in the tax year for which you make them. You are eligible to make regular contributions to a traditional IRA if you are younger than age 70 ½ for the entire tax year and you or your spouse have compensation.

Roth IRA - The Roth IRA gives retirement savers a different incentive - nontaxable distributions. Regular Roth IRA contribution are not tax deductible, so owners will not pay federal taxes on distributions of these contributions. Under certain conditions, the earnings on Roth IRA contributions are also nontaxable when distributed. Therefore, if you expect to be in a higher tax bracket when you take distributions in retirement, for this and other reasons you may benefit more from a Roth IRA than a traditional IRA. You are eligible to make regular contributions to a Roth IRA if you or your spouse have compensation and your modified adjusted gross income (MAGI) for any tax year does not exceed certain prescribed limits. These limits are subject to annual cost-of-living adjustments (COLAs), if any.

When it comes to deciding between a Traditional and a Roth IRA, it comes down to what is most beneficial for you. Think about when you will want to retire, what tax rates will be like when you retire, and which one would be the best choice for you at the time when you open the account. When you decide it is time to open an account, we can help you weigh your options and choose what is best for you. You can learn more about our services here.