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To ensure you have savings for retirement, you need to plan carefully and take advantage of the right investment vehicles. Traditional and Roth IRAs are two options you have, which both offer tax advantages and other benefits that can help you enjoy your retirement. However, there are some crucial distinctions between these options that might make one better for you. Before contacting your accountant, learn more about the differences between these two choices.

Traditional IRAs

Both Roth and traditional IRAs provide general tax breaks, but the key difference is when you can take advantage of them. Traditional IRAs are tax-deferred, which means any funds you contribute can be immediately deducted. However, you'll have to pay income tax on withdrawals you make later. Therefore, your accountant may recommend this option if you think you'll be in a lower tax bracket after retiring.

People with traditional IRAs are also required to take mandatory withdrawals, whether they need the money or not, at the age of 70 and a half. If you take funds out before age 59 and a half, you'll have to pay taxes and a 10% penalty for early withdrawals (unless you meet special exceptions).

Roth IRAs

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Unlike traditional IRAs, funds contributed to Roth IRAs are not deductible, so they won't immediately lower your tax burden. However, those funds are allowed to grow tax-free, and they don't count as taxable income when they're withdrawn. This makes a Roth IRA the ideal choice for those who plan to be in the same tax bracket or higher after retirement.  They can also be advantageous for younger investors who can accumulate a larger amount of tax-free growth in their accounts.

Roth IRA investors also don't have to take minimum withdrawals at any age, and they usually don't pay penalties for taking money out before retirement. However, there may be a tax on withdrawing the investment earnings, so speak to an accountant before making a disbursement.

 

Whether you’re just getting started on retirement planning, or you need a certified public accountant to keep your plan on track, Donna J Troutman, CPA, PC can help. They pride themselves on delivering exceptional, personal services to clients throughout the Lewisburg, PA area, handling everything from retirement planning to small business accounting. To discuss your retirement planning options and make an appointment, visit their website or call (570) 523-7337.

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