Roth IRA vs. Traditional IRA: The best of both worlds

When you explore retirement plans, you may consider Roth and traditional IRAs. How do you decide? It all comes down to tax benefits and the flexibility of each.

Roth IRA contributions are made with after-tax dollars. Since funds are already taxed, earnings grow tax-free if certain conditions are met. However, Roth IRAs are subject to income restriction. Consider the other features of a Roth IRA:

  • Withdrawals of contributions are always tax-free and penalty free
  • Withdrawals of earnings are tax-free and penalty free if the first Roth contribution was made at least 5 years before and you reach 59 ½
  • Withdrawals to beneficiaries are exempt from the 10% penalty prior to 59 ½
  • There is no age limit to contributing to a Roth IRA
  • There is no Required Minimum Distribution (RDM) at age 70 ½

Traditional IRA contributions are made from dollars pre-taxed; therefore, withdrawals are taxable. Traditional IRAs may also be tax deductible depending on your annual household income. Know the other perks and restrictions:

  • Earnings grow tax-deferred until withdrawn
  • Withdrawals may be subject to an additional 10% penalty prior to 59 ½
  • Withdrawals to beneficiaries are not subject to the 10% penalty prior to 59 ½
  • Contributions may be made up to age 70 ½
  • RDMs must begin no later the April 1st of the year following the year you reach 70 ½
  • The penalty for not taking RMD distributions is 50% of the distribution required

If you’re still unsure which to choose, it may be beneficial to have both. Since you are allowed to withdraw contributions from your Roth IRA tax-free and penalty-free, this may be a good second option if you plan to retire earlier and before your traditional IRA funds are available.

Whichever option you choose, the contribution limits are the same for each: $5,500 or $6,500 if you’re age 50 or older by the end of the year. If you are contributing to both, the contribution limit is a combined total of the capped amount.

Contact First Florida Credit Union at (800) 766-4328, ext 1 for more information regarding retirement options for members.

Source: IRS.Gov and CNNMoney

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