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Written by: Core Financial Group
We often get questions from our clients about whether they should invest in a Traditional IRA or a Roth IRA. Our answer is: It depends.
To shed a little bit of clarity. A Traditional IRA and a Roth IRA are not “investments”. They are types of qualified accounts you hold your invested dollars in. They provide tax advantages to the investor if certain criteria are met. Many different investments can be held in either a Traditional IRA or a Roth IRA.
The main difference is a Traditional IRA is invested pre-tax, meaning the dollars you invest are not counted as taxable income today. You will eventually pay tax on the amount invested and pay taxes on the growth of the account when it is withdrawn. This will help reduce taxable income now but add taxable income at some point in the future. A Roth, however, does not provide any tax benefit today. All dollars invested into your Roth IRA are counted in your taxable income in the year they are earned. The advantage of a Roth IRA is that you pay tax on those dollars today and then all the growth of those dollars is tax free in the future.
As you can imagine there are several restrictions on these types of accounts ranging from earned income limits to restriction on early withdrawals. If you are interested in reviewing your current savings or withdrawal strategies, please reach out for more information as we are happy to help.