Planning for retirement is part of investing in your future. However, if you’re like most people, deciding on the best plan for your needs can be a difficult process. An experienced CPA firm will help you with tax preparation and maximizing deductions from those retirement contributions, but you still need to understand the ins and outs of the different accounts. Roth and traditional IRAs are a great way to save for retirement, but they do so in different ways. Here are a few of the key differences between the plans.

3 Key Differences With IRAs & How They Impact Tax Preparation

1. Tax Rates On Contributions

Contributions to traditional IRA plans qualify as tax-deductible investments in your future. For the tax year, you can deduct the contributions up to $5,500 from your tax liability. However, when you start receiving distributions, you’ll have to pay tax on the payments. Roth IRAs, on the other hand, require that you pay taxes on the funds up front. The contributions cannot be deducted from your tax liability. That said, once you start receiving distributions after retirement, that money is sent to you tax-free. 

2. Withdrawal Requirements

Roth IRA contributions can be made and withdrawn at any time, whether you’re close to retirement age or not. This gives you access to those savings immediately, similar to a standard savings account, without increasing your liability come tax preparation time. Keep in mind that any amount of interest earned on the account must be left in the IRA to eliminate the risk of penalties. With traditional IRAs, all withdrawals made prior to the retirement age of 59 and a half, are subject to the early withdrawal penalty in addition to the standard taxes owed on the funds.

3. Income Limits

Roth IRAs place restrictions on who can contribute to the accounts. High earners, typically those with a gross income over $135,000 for single individuals and $200,000 for couples, are not eligible for a Roth IRA. However, traditional IRAs do not have income limits and are open to earners of all income brackets.

Understanding the benefits of IRAs can be confusing, but it doesn’t have to be. Contact Dianne M. Saunders, CPA serving Litchfield, CT, and the surrounding area. She’ll help explain the tax benefits of each plan so you can make the right decision for your needs. Learn more about her tax preparation services online and call (860) 567-3022 to schedule an appointment with a tax consultant.