Which Type Of IRA Should You Choose?

Previously, retirement planning focused on an employer sponsored pension and Social Security retirement benefits. The concept of lifetime employment, however, is largely a thing of the past, which also makes pensions a thing of the past.

Due to such changes, it is increasingly important for you to understand the many options available for retirement planning and asset protection.

An IRA is a tax–advantaged retirement account that you own and control. You contribute to the account each year. The funds in the account grow, both through contributions and investment earnings, each year until you decide to start taking withdrawals.

Think of an IRA as your own personal pension account that is funded by you. The most commonly used of those being the Traditional IRA and the Roth IRA.

Traditional IRA vs. Roth IRA

Both a Traditional and a Roth IRA operate on the same basic principle. However, there are some very important differences between the two. Understanding those differences will help you decide which type of IRA is right for you.

Among the most important differences are:

• Eligibility Age
• Traditional IRA: You must be under age 70 ½ in the year the contribution is made.
• Roth IRA: There is no age limit for contributions.

• Income
• Traditional IRA: There are no income restrictions.
• Roth IRA: You can only contribute to a Roth IRA if your income is below the current income threshold set each year by the IRS and based on your Modified Adjusted Gross Income.

• Contribution Limit
• Traditional and Roth IRA: The individual limit is $5,500 and a married couple has a limit of $11,000.
• Over 50 Contributions: If you are age 50 or older in the year you contribute, you may be eligible to contribute an additional $1,000.

• Taxes
• Traditional IRA: Contributions may be tax deductible, earnings are tax deferred until withdrawn, and after age 59½, withdrawals are not subject to federal tax penalties, but may be subject to federal and state income taxes.
• Roth IRA: Contributions are never tax deductible, earnings are not subject to federal tax penalties if withdrawn after age 59½ and held in the Roth IRA for at least five years, and contributions can be withdrawn at any time without penalty as long as they are held in the Roth IRA for five years, except under certain circumstances.

• Distributions
• Traditional IRA: Distributions must begin by April 1st of the year after which you turn 70½. Required minimum distributions are determined by dividing the prior year–end fair market value of the retirement account by the applicable distribution period or life expectancy.
• Roth IRA: No mandatory age for taking distributions.

Does An IRA Offer An Estate Planning Advantage?

Deciding whether a Traditional IRA or a Roth IRA is a better option for you requires you to consider not only the financial aspect of your choice, but also the estate planning repercussions. Ultimately, a Roth IRA offers a significant estate planning advantage over a Traditional IRA.

With a Traditional IRA, your estate may be required to pay both income and estate taxes on the value of the IRA whereas with a Roth IRA your estate may only incur estate taxes because you prepaid the income taxes when you made your contributions.

Both Traditional and Roth IRAs have complex rules and eligibility guidelines that are subject to change on a regular basis. To ensure you are making the right choice for both retirement and estate planning purposes, be sure to consult with an estate planning attorney.

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