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Finance and Investing can be confusing and complex with so many different types of retirement accounts and options for investing for your dream retirement. Two of the most popular types of Individual Retirement Accounts (IRAs) are Traditional IRAs and Roth IRAs, and both offer tax advantages for retirement savings and growth. While both offer valuable benefits, there are some important differences to consider. In this blog, we’ll explore the differences between a Traditional IRA and a Roth IRA, and discuss why speaking to a consultant at Goodwin Investment Advisory in Woodstock, Georgia could help you make the best decision for your individual situation.
First, let’s define each type of IRA. A Traditional IRA is a tax-deferred retirement account. This means that contributions made to the account are typically tax-deductible in the year they are made, but withdrawals in retirement are subject to income tax. With a Roth IRA, the contributions are made with after-tax dollars, meaning that you don’t receive a tax deduction in the year you make contributions. However, withdrawals in retirement are generally tax-free.
To summarize, one of the key differences between these two types of IRAs is how they are taxed. With a Traditional IRA, you pay your taxes later – i.e. on withdrawals in retirement. With a Roth IRA, you pay your taxes now – i.e. when you make the contributions. This means that if you expect to be in a higher tax bracket in retirement than you are currently, a Roth IRA may be a good option. On the other hand, if you expect to be in a lower tax bracket in retirement, a Traditional IRA may be the way to go.
Another factor to consider when choosing between a Traditional IRA and a Roth IRA is your investment strategy. Both types of IRAs allow you to invest your money in a variety of different ways, including stocks, bonds, and mutual funds. However, a Roth IRA may be a better choice if you plan to hold your investments for a long time and expect them to grow significantly in value, because you won’t have to pay taxes on the growth when you withdraw the money in retirement.
It’s important to note that the maximum amount you can contribute each year to a Traditional IRA or a Roth IRA may change from year to year. In addition, the amount you can contribute may depend on your income level and other factors. Here are the maximum contribution limits for both types of IRAs for the year 2023:
For a Traditional IRA:
For individuals under age 50: $6,500
For individuals age 50 and over: $7,500
For a Roth IRA:
For individuals under age 50: $6,500
For individuals age 50 and over: an additional $1,000 catch up contribution if eligible
It’s also important to note that the maximum contribution limits for both types of IRAs may be reduced if your income exceeds certain thresholds. For example, to contribute to a Roth IRA, single tax filers must have a modified adjusted gross income (MAGI) of less than $153,000 in 2023. If married and filing jointly, your joint MAGI must be under $228,000 in 2023. These numbers change all the time so it is always best to check with your financial advisor or accountant to make sure you have the correct information.
You can reference our 2023 Tax and Retirement Planning Quick Sheet.
Finally, it’s worth considering the services of an advisor when choosing between a Traditional IRA and a Roth IRA. An experienced advisor can help you understand your options, and make recommendations tailored to your needs. At Goodwin Investment Advisory in Woodstock, Georgia, our team of CFP® professionals are dedicated to helping clients make informed decisions about their retirement savings. Whether you’re just starting out or you’re nearing retirement age, we can help you choose the right IRA for your individual situation. Contact us today to schedule a consultation and take the first step toward a more secure retirement.
“Traditional IRA vs. Roth IRA.” Investopedia, Investopedia, 23 Apr. 2021, www.investopedia.com/articles/personal-finance/111314/traditional-ira-vs-roth-ira.asp.
“Roth vs. Traditional IRA: Which Is Right for You?” The Balance, The Balance, 22 Mar. 2021, www.thebalance.com/roth-vs-traditional-ira-which-is-right-for-you-2388392.
“Retirement Topics – IRA Contribution Limits.” Internal Revenue Service, 26 Feb. 2021, www.irs.gov/retirement-pl