Traditional IRA vs. Roth IRA

Presented by Marc Aarons

I’ve been getting a lot of questions from clients lately about whether they should contribute to a Traditional or a Roth IRA, so I wanted to reach out and proactively share with you the benefits and drawbacks of each.

Traditional IRA:

• Contributions to a traditional IRA are made with pre-tax dollars, reducing your taxable income for the year.
• Investment earnings grow tax-deferred, meaning you do not pay taxes on them until you withdraw funds from the account.
• Withdrawals from a traditional IRA are taxed as income at your ordinary income tax rate in retirement.
• Currently, Required Minimum Distributions (RMDs) must be taken starting at age 72, although the rules for starting RMDs will be changing over the next few years as new tax rules are rolled out.
• Income is generally lower in retirement, so you may benefit from a lower tax rate on your distributions.
• The RMDs may result in you having to withdraw more than you want to each year during retirement.

Roth IRA:

• Contributions to a Roth IRA are made with after-tax dollars, so they are not tax-deductible.
• Investment earnings grow tax-free, meaning you do not pay taxes on them when you withdraw funds from the account.
• There are no RMDs for Roth IRAs.
• If you end up in a lower tax bracket during retirement, your initial contributions may have been taxed at a higher rate.

Ultimately, everyone’s financial situation is unique, and what works best for one person may not be the best option for another. That said, if you’d like additional guidance, I’d be happy to evaluate your personal tax situation and projected retirement income to help determine the best option for you.

Simply respond to this post or give me a call, and we’ll find some time to meet.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.