Updated: August 26, 2024
Whether you’re close to retirement after many years in the workforce or you’re a young adult just starting your career, retirement planning can seem a bit overwhelming. No matter what career stage you’re in, it’s never too late or too early to start saving for retirement. What’s most important is that you get started now to help ensure that you have a financially secure future.
According to an AARP survey, 20% of adults ages 50+ have no retirement savings. “It’s important to have a retirement plan in place for your financial future. Planning for your future, sets you up to be able to support yourself and enjoy a lifestyle you’re used to,” said Kristin, our IRA expert and Member Account Support Manager. While there are many ways to save for retirement such as 401(k) or pension plans, an IRA (individual retirement account) is a retirement savings account that has a tax advantage. The two most common types of IRA accounts are Traditional and Roth IRA. Here's a breakdown of each type of IRA account.
A Traditional IRA is a retirement account that is "tax-deferred." This means you'll pay taxes on this account in the future. During the years that you contribute to this account, you may see immediate savings. When filing your taxes, you may be able to deduct the amount you've contributed to your Traditional IRA, which will reduce your taxable income, which reduces the amount you'll owe in taxes.*
When the time comes to retire and withdraw money from your account, you will then pay taxes on the amount you withdraw.
The money saved in this account can be distributed if you are 59 ½ years old without occurring a penalty tax. However, there are exceptions that allow you to make a distribution with no early withdrawal penalty.*
This option provides you with immediate tax benefits.
A Roth IRA is a retirement account that is "tax-exempt." This means you'll pay taxes on this account while you contribute to it, but will not have to pay taxes when you withdraw from it later on.* Your contributions are not tax-deductible, which means your taxable income will not be lowered, so you'll be paying taxes on the account upfront. This is often referred to as "after-tax" contributions.
When the time comes to retire, you will not pay taxes on your Roth IRA withdrawals. The amount of money in the account is the amount of money you'll have access to. Like a Traditional IRA, the money in this account can be distributed if you are at least 59 ½ years old and after a five-year waiting period is over (you must wait five years after your first contribution into the account before you can withdraw without a penalty).
However, a Roth IRA offers some additional perks allowing you to withdraw early with no penalty if you're buying your first home, have a qualified education expense, or if you become disabled. If you pass away before you turn 59 ½ and are eligible to withdraw, your beneficiary can withdraw from your Roth IRA early without penalty.
This option provides you with future tax benefits.
| Traditional | Roth | |
|---|---|---|
| Eligibility | Anyone with earned income is eligible to contribute. | No age restriction. Anyone with earned income is eligible to contribute, depending on their MAGI. |
| Contribution Limits | Under 50 years old: you can contribute up to $7,000. Over 50: you can contribute up to $8,000 annually. |
Under 50 years old: you can contribute up to $7,000. Over 50: you can contribute up to $8,000 annually. |
| Minors Contribution | Minors and spouses can both contribute to IRAs. | Minors and spouses can both contribute to IRAs. |
| Contribution Deadline | The deadline is typically April 15 (Tax Day) of the following year. | The deadline is typically April 15 (Tax Day) of the following year. |
| Withdrawals | You can withdraw money at age 59 ½. However, tax penalties may apply for early withdrawals. |
You can withdraw money at age 59 ½. However, tax penalties may apply for early withdrawals. |
| Taxes |
Contributions may be deducted. Any contributions or earnings are taxable when withdrawing. |
Contributions are not tax-deductible. Offers tax-free growth and tax-free withdrawals. There is no tax on withdrawals in a Roth IRA. |
| Income Limits | Anyone with an income can contribute to a Traditional IRA. The tax deduction rate depends on what you earn. |
Single filers: $146,000 Joint filers: $230,000 |
| Income Caps | Income caps cannot stop you from contributing to a Traditional IRA. | In a Roth IRA, you may not be able to contribute due to income caps. |
| Minimum Required Distributions |
In Traditional IRAs, the minimum required distributions start at 73. | Roth IRAs do not require any minimum distribution during the life span of the owner. |
| Deduction on Contributions |
You may be able to deduct some or all Traditional IRA contributions. | You cannot deduct your Roth IRA contribution. |
You can easily open an IRA at most banks, credit unions, or other financial institutions. We offer both Traditional IRA and Roth IRA options, here at AllSouth. You can visit any location to establish an account. We can also assist you if you have another account you want to rollover into an IRA. “If you’re leaving a job and have a 401(k) plan with that employer, you can easily rollover the account into an IRA. We will work directly with the employer to set up the account,” said Kristin.
The main difference between a Traditional IRA and a Roth IRA is the timing of their tax advantages. With Traditional IRAs, you deduct contributions now and pay taxes when you withdraw later and with a Roth IRA, you'll pay taxes on contributions now and won't have to pay taxes on your withdrawals later. Either option can help set you up for a secure financial future during retirement. For more tips on retirement, check out our article Ask the Expert: Common IRA Questions.