Roth versus Traditional IRA’s
While both types of IRA’s (Individual Retirement Accounts) can be beneficial, each type has very unique qualities. First off, the Roth IRA is contributed on an “after tax” (non-deductible) basis, whereas the Traditional IRA is contributed on a “pre-tax” (deductible) basis. So while the contributor to a Traditional IRA is allowed a deduction for contributions made, upon withdrawal the account holder must pay regular income taxes on distributions, whereas the contributor in the Roth IRA account does not pay income taxes on future distributions, as long as the account holder has held the account for at least 5 years and has reached retirement age (59 ½ years old). Furthermore, while both types of IRA’s are intended to be held until retirement age, the holder of a Traditional IRA must begin withdrawing funds, under the RMD (required minimum distribution) rules, at age 70 ½, whereas the holder of the Roth IRA isn’t required to distribute their funds, and in fact upon the holder’s death the Roth IRA funds can readily transfer to beneficiaries without any specific distribution requirements. As a general rule, Roth IRA’s are the preferred type of IRA accounts, especially the longer the time in which the account is allowed to grow. However if the taxpayer desires to have a tax deduction upon contribution, then the Traditional IRA, even though taxable upon distribution, may be preferable. Please contact us if you’d like to discuss IRA’s, as well as which type of account would be best for your particular circumstances.
Posted May 21, 2015/wittenbergcpa.com