Traditional IRA vs Roth IRA

The acronym IRA stands for Individual Retirement Account and it represents one of the most flexible retirement options available to most people. When compared to a typical 401(k), 403(b) or other retirement savings plan provided by some employers, the IRA allows a much greater range of investments that you can use to build your retirement. For both types, the minimum age that funds may be withdrawn without penalty is 59 1/2.

Perhaps the most fundamental choice that one can make when creating an IRA is whether or not you want to create a traditional IRA or what is known as a Roth IRA. With a both types of IRAs, you fund the retirement account through deposits which are then made available to invest as the owner sees fit. You can trade or invest in a huge array of mutual funds, exchange traded funds, stocks, bonds, certificates of deposit and more from either type of IRA.

The primary difference between the two types ofIndividual Retirement Accounts is when you decide that you would prefer to pay taxes on any funds withdrawn from the accounts. With a traditional IRA, when money is deposited into the account, taxes on investment earnings are deferred until funds are actually withdrawn from the account, usually in retirement. The deposit itself may or may not be tax deductible, depending on several factors including your taxable income in the year of the deposit.  When the account holder decides to withdraw funds, the taxes are paid only when the withdrawal is made.

With a Roth Individual Retirement Account, income taxes are paid when funds are deposited into the account, on the front end. All the earnings in the Roth IRA account are not taxed and later on, in retirement, withdrawals are not taxed either.  As a long term tax planning tool, a Roth IRA can be a powerful ally as it is one of the only truly tax free retirement savings vehicles available.  Some employer sponsored 401(k) plans offer a Roth 401(k) option which bears some resemblance to a Roth IRA but has many additional features and advantages.  If your employer offers Roth 401(k) accounts, talk to your financial advisor to see if they might be a good option for you.

There are some tax implications involved with early withdrawal from regular IRA accounts. There is a penalty of 10% of the value of the withdrawal if you withdraw before age 59 1/2  and the amount of the withdrawal is counted as income on that year’s taxes.  Roth IRAs have different rules- to qualify for the tax free penalty free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½.

If you want to save for your retirement, employer sponsored plans can be a great vehicle and IRA accounts may be a viable supplement. If your employer doesn’t offer a retirement plan, Individual Retirement Account accounts may be a very important option for you to consider.

Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice.  Please contact your financial adviser with questions about your specific needs and circumstances.  The opinions expressed herein are those of the author and not necessarily those of United Capital Financial Advisers, LLC.  Opinions expressed are current as of the date of this publication and are subject to change.