Traditional and ROTH IRA There are lots of options when it comes to saving and investing for retirement. There are numerous types of employer sponsored retirement plans (e.g. 401k, 403b, SIMPLE IRA, SEP IRAs) but only two available types of Individual Retirement Accounts (IRA) that an individual can fund outside their employer’s plan. These two options, the Traditional IRA and ROTH IRA, have some similarities but are distinctly different from a tax perspective. The following article will offer an overview of Traditional and ROTH IRAs.

Made available through legislation passed in 1974, the Traditional IRA permits individuals an account option to save for retirement allowing for a variety of investment options which allows for tax deferral of earnings and generally a tax deduction in funding contributions.

In funding a Traditional IRA, the tax deductibility of contributions is dependent on one’s tax filing status, modified adjusted gross income (MAGI), as well as if they participate in an employer sponsored retirement plan. Contributions to a Traditional IRA are fully deductible regardless of income if the individual and spouse are not participants in an employer sponsored plan. However, if both spouses are participants in an employer sponsored plan, a fully deductible contribution would only be allowed if their MAGI was under $105,000. Separate rules and amounts apply for non-married individuals, those that are married where only one spouse is a participant in an employer sponsored plan, or if one is married but does not file a joint tax return.

A withdrawal from a Traditional IRA is a taxable event and the rate of taxation on the withdrawal is a function of that persons income tax bracket (currently 0%-37% federally) in the year of withdrawal. Additionally, withdrawals taken before age 59 ½ are subject to an early withdrawal penalty unless a penalty exception applies. At age 72, and yearly thereafter, the Traditional IRA owner must begin to withdraw a minimum amount from the account, which is called a required minimum distribution.

As an alternative to the Traditional IRA, the ROTH IRA was created with the passing of the Taxpayer Relief Act of 1997, giving retirement savers another option. The key difference in a ROTH IRA is it allows no tax deductibility for contribution but the entire balance (principal contributions and investment earnings) is tax free for qualified distributions1. There are no required minimum distributions from a ROTH IRA. Not everyone is eligible to fund a ROTH IRA and those married with MAGI over $198,000 ($125,000 for individual tax filers) will be limited or even not permitted to fund ROTH IRA contributions.

Rates of return on Traditional and ROTH IRAs are driven by the underlying investment( s) within that particular account. In other words, the type of IRA doesn’t drive investment returns but rather the taxation of the account type. Earnings (i.g. dividends, interest, capital gains) within both IRA account types are tax deferred, meaning those earnings are not counted as income to the IRA owner in the year those earning are made.

Anyone with earned income, even a minor, may fund an IRA with the exception of the ROTH IRA which is subject to income limits. If only one spouse has earned income and the other spouse has no earned income, the non-earning spouse may still make an Traditional IRA or ROTH IRA contribution by way of a “spousal contribution”. Traditional and ROTH IRA contribution limits are $6,000 per person ($7,000 if age 50 or better) for 2021. The deadline for IRA contributions is the tax filing deadline (generally April 15th of the following year). Traditional or ROTH IRA accounts can be established at most banks or credit unions or with a brokerage firm or an investment advisor. Generally the investment options available to invest within an IRA are greater with a brokerage firm or investment advisor.

Traditional and ROTH IRAs are flexible and tax advantaged options in saving and investing for retirement. There is no best “one-fit” for everyone as personal facts such as age, income, and financial goals should be considered in determining which IRA type is best suited for that person. There are numerous advanced IRA financial planning strategies that go beyond the scope of this article, however, this article will have provided an overview on the key features and differences between the Traditional and ROTH IRA account options.

Adam Smit is a CERTIFIED FINANCIAL PLANNER™. Tax preparation services are not offered at Adam Smit Investment Management LLC and customers should seek specific tax guidance from a qualified tax advisor. This article is for general information and educational opportunities only and not intended to provide specific advice or recommendations. The figures listed above are for tax year 2021 and are subject to annual adjustments. Securities offered through LPL Financial. Member FINRA/SIPC.

1 – Generally a qualified distribution is one that occurs at least five years after the first ROTH contribution and the ROTH account owner is at least age 59 ½ years old.

The scene outside the village Hall on Election Day Tuesday April 6. With sun bright and police vehicle just off camera to the right, the atmosphere was decidedly calm, allowing for quick and secure voting by those seeking to. Staff photo.