With so many different types of retirement accounts, how do you know which one is right for you? It may be easier than you think to decide what the best option is.
First of all, if you work for an employer that provides retirement benefits in an employee sponsored retirement account, then the decision has already been made for you.
Depending on where you work, such as a for-profit company, a non-profit company, or the government, you may have a 401K, 403B or Thrift Savings Plan (TSP).
Often these employers will match your contributions up to a certain percentage, say 3-5%.
But what about those that are either self-employed or work for a company that doesn’t have
retirement benefits?
The two main types of self-directed retirement accounts are the Traditional Individual Retirement Account (Trad IRA) and the Roth Individual Retirement Account (Roth IRA).
The main difference between these two is WHEN you pay taxes on the money contributed and distributed/withdrawn. Money contributed to a Traditional IRA is considered pre-tax and would count as a deduction on your earned income for that tax year. This means that when you take distributions (remove the money), you will pay taxes upon distribution. In other words, the money invested is tax deferred until you take distributions.
The Roth IRA is different because you pay taxes on the income that is contributed to the account. The money contributed and any gains are tax-free in retirement. For a great comparison chart see
this article
at Investopedia. There are income limits with the Roth IRA, which adjusts most years, you can review that in the article listed as well.
Generally speaking, both types of retirement accounts have maximum contribution limits for 2022 of $6,000; or $7,000, if age 50 or older. For 2023 these limits are increasing to $6,500; or $7,500, if age 50 or older.
If you have both types of accounts the combined total contributed between the two must not exceed the overall IRA contribution limit for that tax year. An example of this would be that someone under 50 could contribute $3,000 to a Trad IRA and another $3,000 to a Roth for the tax year 2022 for a total of $6,000 max between the two types of accounts.
You should consider asking yourself this important question: Will I pay more in my taxes on my earnings now than when I retire?
You may have more tax credits or deductions now compared to when you are retired and taking distributions from your Trad IRA, so you may end up paying more in taxes once retired, especially if you are still working and also have to start taking distributions.
Whereas, if you contribute to a Roth IRA now, you will pay taxes on those earnings now and be able to withdraw them tax free upon retirement.
We recommend speaking with a Tax Attorney or CPA to discuss eligibility for retirement
accounts because if you also work for an employer that provides retirement benefits, there are limits on how much you can contribute to self-directed IRAs. They could also possibly discuss what your tax situation would look like upon retirement to help you decide which type of self-directed account best suits your personal financial needs.
Either way you go though, saving for retirement is important, so start saving as early in your life as you can and if you haven’t started yet, there is no time like the present! Get an IRA account opened and start contributing, even just $50 a month if you can! Be consistent!
At TRADEway, we’re here to help with your short-term trading or long-term investment needs–we have programs available which can educate and support you through whatever path you decide to take. Want to be more active in your investments? Want to take a more passive approach? Either way, we have something that could help your family. Reach out TODAY!
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