Roth and Traditional IRAs – What’s the Difference?
Capitol Federal is committed to helping you and your family achieve your financial goals, and retirement planning is an important piece of a well-rounded financial plan. We recently sat down with Financial Advisors Justin Gordon and Bob Florence to discuss a common question: Should you invest in a Roth IRA or a Traditional IRA?
Traditional IRAs and Roth IRAs share certain general characteristics.
• Both feature tax-deferred growth of earnings and allow you to contribute up to $6,000 in 2021 (unchanged from 2020) of earned income, plus an additional $1,000 "catch-up" contribution if you're 50 or older. (This is the maximum you may contribute to all IRAs.)
• Both allow certain low- and middle-income taxpayers to claim a partial tax credit for amounts contributed.
But important differences exist between these two types of IRAs. In fact, the Roth IRA is in some ways the opposite of the Traditional IRA.
A Traditional IRA allows anyone with earned income to contribute the maximum $6,000 in 2021, 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 72, you must begin to take annual distributions from a Traditional IRA.
You can also contribute to a Roth IRA, as long as you have taxable compensation. 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.
• Qualified withdrawals will avoid both 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.
For more information about IRAs and about Capitol Federal Investment Services call Justin Gordon at 785-274-5707 or Bob Florence at 913-652-2218 or email us at Justin.Gordon@raymondjames.com and Robert.Florence@raymondjames.com.
This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The material is general in nature. Raymond James does not provide advice on tax or legal. These matters should be discussed with the appropriate professional.
Content Prepared by Broadridge Investor Communication Solutions, Inc.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Capitol Federal® Investment Services is not a registered broker/dealer and is independent from Raymond James Financial Services. Securities are offered through Raymond James Financial Services, Inc., Member FINRA/SIPC, an independent broker/dealer, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal.
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