Roth vs Traditional IRA
Ali vs Frazier, Nicklaus vs Palmer, Roth IRA vs Traditional IRA, these are still some of the hotly debated rivalries of all-time. The most fascinating one to me of course is the battle between the Roth and Traditional IRA. The Traditional IRA allows qualifying investors to take a tax deduction (reduces present taxation) on annual contributions with the understanding that the money will be taxed when it is withdrawn. The Roth IRA does not allow for a tax deduction but permits the investor to withdrawal money tax-free after age 59 ½. Assuming taxes remain level over the years, one would think that they are mathematically equal, however, the Roth does offer a few nice features that the Traditional IRA does not. In terms of its effect on Social Security, the withdraws from a Traditional IRA and Roth IRA are treated very differently. Withdrawals from a traditional IRA in retirement years count as income that could cause portions of your Social Security benefit to be taxed. However, distributions from a Roth IRA are not counted as income against Social Security benefits, making it a highly efficient retirement income generator. The Roth also has its advantages as a legacy planner. While the federal government will require you to start taking distributions from a Traditional IRA by age 70 ½ to begin taxation, the Roth IRA does not have a required minimum distribution age, making it a great vehicle for setting aside money to pass onto heirs. The third advantage the Roth has over the Traditional is its liquidity prior to age 59 ½. Contributions made to a Traditional IRA have penalties and taxes associated with pulling any money out prior to age 59 ½. The Roth IRA on the other hand allows you to pull out your contributions (just not growth) prior to age 59 ½ without penalty, giving it more liquidity than the Traditional IRA during accumulation years. Learn how to coordinate the two IRAs for efficiency here: https://www.youtube.com/watch?v=9RTBmBmDisc or you can also watch the video at crosbyadvisory.com.