You know you need to save for retirement but choosing between a Traditional IRA and a Roth IRA can be confusing. Neither option is a perfect solution for every investor. Deciding which one is right for you depends on your age, income, assets and personal preferences. Ultimately, you need to determine if it is financially beneficial to defer taxes on retirement income until you retire or pre-pay future income taxes now.

Traditional IRA

With a traditional IRA, you invest pre-tax dollars into the retirement fund and pay taxes when you retire and/or start taking distributions. Until age 70 ½, you can contribute up to $5,500 per year or $6,500 per year if you are over 50. While your contributions are invested and earning interest, they are tax-deferred, meaning that you do not pay taxes on capital gains until you reach 70 ½ at which point you must start taking distributions. This is known as the Required Minimum Distribution. If you take any distributions before you turn 59 ½ you will have to pay a 10% penalty in taxes. Traditional IRAs are recommended for those who expect their income and the tax rate to be lower in retirement.

Roth IRA

With a Roth IRA, you pay taxes now and enjoy tax-free growth and tax-free distributions in retirement. You make contributions with after-tax dollars so you do not get a tax deduction for your contribution.  The contribution limits of $5,500 or $6,500 per year are the same as a traditional IRA but you can contribute at any age and there are no Required Minimum Distributions. Like a traditional IRA, there is a 10% penalty for taking distributions before age 59 ½. Roth IRAs are especially beneficial for those who have a taxable estate because it allows you to pre-pay the income tax your beneficiaries would be responsible for.

If you have any trouble figuring out what is the best retirement option for you, contact the Miles Tax and Advisory team. Our financial experts can review your individual situation and provide you with a comprehensive tax planning strategy. Please feel free to give us a call at 410-685-1406 or by email at info@miles-tax.com.