All individuals with earned income can contribute to a Traditional IRA and may benefit from tax-deferred compounding of potential earnings. Some who meet income requirements can make contributions that are deductible from current taxes. Earnings and tax-deductible contributions are taxed at ordinary income tax rates when money is withdrawn from the IRA.
A Traditional IRA may be a good choice if you:
- qualify to make tax-deductible contributions;
- earn too much income to be eligible to contribute to a Roth IRA;
- want to build a pool of savings that could be converted to a Roth IRA at a later date; or
- expect to be in a lower tax bracket when you retire.
Roth IRAs offer the power of tax-free compounding of potential earnings making them an alternative for many investors who qualify to make contributions (based on income limits). If holding period requirements are met, all earnings that accumulate in a Roth IRA can be withdrawn on a tax-free basis. By paying taxes now before you make contributions, you may save the tax benefits for later – even beyond your own life. Dollars accumulated in a Roth IRA can generate a stream of tax-free income for you later in life. Money remaining in your account after your death can continue to provide tax-free income for your heirs.
A Roth IRA may be a good choice if you:
- want a source of tax-free income in retirement;
- seek to avoid required minimum distributions (RMDs) from your IRA when you reach age 70-1/2 (distributions are required from a Traditional IRA at that age);
- expect to be in a comparable or a higher tax bracket when you retire; or
- wish to leave heirs with a tax-advantaged income source after your death.
Please consult with your tax advisor for details on which IRA is the best for your situation.
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