Here are 3 key differences between a Traditional IRA and a Roth IRA, along with their respective advantages and disadvantages:

1. Tax Treatment:

   Traditional IRA:

   • Contributions are typically tax-deductible, meaning you can reduce your taxable income for the year in which you make contributions.

   • Withdrawals in retirement are taxed as ordinary income, including both contributions and earnings.

   Roth IRA:

   • Contributions are made with after-tax dollars, so they are not tax-deductible.

   • Qualified withdrawals in retirement, including both contributions and earnings, are tax-free.

2. Withdrawal Rules:

   • Traditional IRA: Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty, in addition to income tax, unless an exception applies.

   • Roth IRA: Contributions (principles) can be withdrawn at any time tax-free and penalty-free. Earnings can be withdrawn tax-free and penalty-free after age 59½, as long as the account has been open for at least five years.

3. Tax Diversification:

   • Traditional IRA: Traditional IRAs provide tax-deferred growth, which can be advantageous if you expect to be in a lower tax bracket in retirement.

   • Roth IRA: Roth IRAs offer tax-free withdrawals in retirement, providing flexibility to manage taxes and potentially reducing tax liability in retirement.

Advantages and Disadvantages:

Traditional IRA:

• Advantages: Immediate tax deduction for contributions, potential for tax-deferred growth, and flexibility in contribution amounts.

• Disadvantages: Mandatory RMDs (Required Minimum Distributions) in retirement, taxable withdrawals, and potential limits on deductible contributions.

Roth IRA:

• Advantages: Tax-free withdrawals in retirement, no mandatory RMDs during the owner's lifetime, and greater flexibility in estate planning.

• Disadvantages: Contributions are not tax-deductible, income limits for eligibility, and potential penalties for early withdrawals of earnings.

In 2024, the annual contribution limit for both Roth and traditional IRAs rises to
$7,000 for those under 50, and $8,000 for those 50 and above.

If you are looking into explore options for your retirement plan, our experts can help you compare with real numbers! Let's schedule a call with us!