Differences between Roth & Traditional IRAs Transcript

Hi, I’m David Hovis, financial advisor at Hovis & Associates.  Every spring, we hear from clients interested in making an IRA contribution.  In some cases, they have met with their tax advisor and are looking for ways to reduce their taxable income.  Others may be seeking ways to save for retirement.  Most commonly people ask about Roth IRAs and Traditional IRAs.  These accounts have a few similarities but also some major differences. 

One of the similarities these accounts share is the contribution limits.  For 2020, the contribution limit is $6,000 for those under 50 or $7,000 for those 50 and older.  In order to participate, you must have earned income, and that income must be equal to or greater than the amount you contribute to your IRA.  Non-working spouses can also contribute to an IRA if their spouse has earned income.  

Another similarity is that both types of IRA have income limits.  You’ll need to determine your Modified Adjusted Gross Income to know where you fall within these limits.  Check with your tax advisor or look on your tax filing to determine this value.

Now, the differences in these accounts.

First, a Traditional IRA.  This is a tax-advantaged account that grows TAX-DEFERRED and allows you to deduct these contributions from your taxable income in the year you make them.  When you take a withdrawal in retirement from a Traditional IRA, that amount is considered taxable income based on your tax rate at that time.  Withdrawals can be taken without an early withdrawal penalty if you are age 59 ½ or older.  Once you reach age 72, the IRS requires you to take distributions annually – called a required minimum distribution or RMD.

By comparison, a Roth IRA is a tax-advantaged account that grows TAX-FREE because the money invested in the account is money that has already been taxed.  When you take a withdrawal, you will not be taxed on any qualified distributions received if you are over age 59 ½ and the Roth has been open for 5 years or more.  You will not be required to take RMDs from a Roth, like you do a traditional IRA.

There are a lot of factors to consider when deciding between a Roth IRA and a Traditional IRA.  Before you invest, it’s important to know your options so you pick the one that best fits your needs.  And that’s where we come in.  Call Hovis & Associates to schedule a meeting to help customize an investment strategy for you.

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Until next time….