When considering if you should invest in a Roth Individual Retirement Account (IRA) or a Traditional IRA, there is no easy answer.
Traditional IRAs and Roth IRAs share certain general characteristics, including featuring tax-deferred growth of earnings and allowing you to contribute up to up to $6,500 in 2023 (taxpayers aged 50 and older can also make “catch up” contributions—up to an additional $1,000 for in fiscal year 2023). Both allow certain low- and middle-income taxpayers to claim a partial tax credit for amounts contributed. However, important differences exist between these two types of IRAs as noted below.
A Traditional IRA allows anyone with earned income to contribute the maximum $6,500 in 2023, plus catch-up if eligible. However, your ability to deduct Traditional IRA contributions will depend on your annual income, your filing status and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion or none of your contribution for a given year. Any distribution from a Traditional IRA will be subject to income taxes to the extent that the distribution represents earnings and deductible contributions. You may also be hit with a 10% early withdrawal penalty if you draw money out before age 59½ (there are exceptions to this rule). Beginning at age 73, you must begin to take annual distributions from a Traditional IRA.
You can also contribute to a Roth IRA, as long as you have earned income. However, your ability to contribute and the amount you'll be able to contribute (up to the annual limit) will depend on your income and tax filing status. Although Roth IRA contributions are not tax deductible, Roth IRAs have other advantages. You're not required to take distributions from a Roth IRA at any age, which gives you more estate-planning options. Another key strength is, under current tax law, qualified withdrawals will avoid both federal income tax and the early withdrawal penalty if certain conditions are met. Nonqualified withdrawals will be taxed and penalized only on the earnings portion of the withdrawal, since the principal is your own after-tax money.
Your personal goals and circumstances will determine which type of IRA is right for you. If you wish to potentially reduce taxes during retirement or help preserve assets for your heirs, a Roth IRA may be the way to go. A Traditional IRA may make more sense if you can make deductible contributions and want to lower your taxes while you're still working.
Deciding which type of IRA is most appropriate for you can be difficult, which is why Busey offers retirement planning services to our customers. To learn more about the comprehensive services offered by Busey Wealth Management, visit busey.com/wealth-management.
Note: You can have both a Traditional IRA and a Roth IRA, but your total annual contribution to all the IRAs that you own cannot exceed the annual contribution limit.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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