An Individual Retirement Account (IRA) is a type of investment account that is designed to help individuals save for retirement. There are two main types of IRAs: a Roth IRA and a Traditional IRA. Both types of IRAs have their own unique set of pros and cons that should be considered when choosing the right account for your individual situation.

Roth IRA

A Roth IRA is an account that is funded with after-tax dollars, which means that you will not receive a tax deduction for contributions made to the account. However, the money in the account can grow tax-free, and withdrawals taken in retirement are also tax-free. This is a significant advantage of a Roth IRA, as it allows you to avoid paying taxes on your savings and investments in retirement.

Another advantage of a Roth IRA is that there are no age restrictions for contributions, unlike a traditional IRA, which typically disallows contributions after age 70 1/2. Roth IRAs also don’t have Required Minimum Distributions(RMD) in the same way traditional IRA does. This means you can leave your money in the account for as long as you want and continue to let it grow tax-free.

Traditional IRA

On the other hand, a Traditional IRA is an account that is funded with pre-tax dollars, which means that contributions made to the account are tax-deductible. However, the money in the account is taxed when it is withdrawn in retirement. This is a significant disadvantage of a Traditional IRA, as it could result in a higher tax bill for retirees.

A Traditional IRA may offer a tax benefit for those who are in a high tax bracket and want to lower their current tax bill. Additionally, a traditional IRA may have a wider range of investment options to choose from, which may be a good option for those who want more control over their portfolio.

A person stacking coins in three piles on a table

Summary

In summary, a Roth IRA may be a better option for those who expect to be in a higher tax bracket during retirement, want tax-free withdrawals, and are willing to pay taxes on contributions now. On the other hand, a Traditional IRA may be a better option for those who are currently in a high tax bracket, want to lower their current tax bill, and are willing to pay taxes on withdrawals in retirement.

Ultimately, whether a Roth IRA or a Traditional IRA is right for you will depend on your individual financial situation, goals, and risk tolerance. It’s important to consult with a financial advisor to determine which account is best for you.

About the author: Trent Madill

Hey there! I'm Trent, Founder & CEO of Atticus. I am a licensed Investment Advisor Representative (IAR), and I look forward to helping you reach your financial goals.

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