If you’re looking for ways to save for retirement that can also lower your tax liability, you may be looking into adding an IRA into your retirement portfolio. Below are just a few of the things you’ll want to know about Roth IRAs versus Traditional IRAs.
A traditional IRA is a way to save for retirement and help you lower your tax liability. A IRA, also known as an individual retirement arrangement, is a personal savings plan that allows you to allocate pre-tax income toward investments. The growth of that investment is tax-deferred, meaning the IRS will not access capital gains and/or dividend income until you make withdrawals from the account. In most cases, traditional IRA contributions can be deducted from your taxes. There are, however, caps on what can be deducted. For the 2022 tax year, that cap is set at $6,000. For the 2023 tax year, that limit has been raised to $6,500.
What is a Roth IRA?
Unlike a traditional IRA, which allows you to contribute pre-tax income, contributions to a Roth IRA come from after-tax dollars. Although Roth IRA contributions won’t help you reduce your AGI when you file your taxes, in this type of account, the contributions you add can grow tax-free. You can also withdraw them tax and penalty free either A) after the account has been open for 5 years, or B) after you are 59.5 years old.
You’ll want to keep in mind,however, that there are income limits that apply to Roth IRAs. Suffice to say, if you’re interested in learning more about whether you can benefit from this type of retirement savings account, you’ll want to speak with your financial planner and/or tax specialist to learn more.
Other pertinent information
According to the IRS:
You can set up an IRA with a:
- bank or other financial institution
- life insurance company
- mutual fund
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.
- You cannot deduct contributions to a Roth IRA from your taxes.
- If you satisfy the requirements, qualified distributions are tax-free.
- You can leave amounts in your Roth IRA as long as you live.
If you have questions about the similarities and differences between a Roth IRA and Traditional IRA, we can help. Call Hughes Snell & Co., today to set up a time to speak with a licensed CPA that you can trust.