Capitol Federal is dedicated to helping you and your family reach your financial goals. Retirement planning is a key part of a solid 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 and Roth IRAs share certain general characteristics.
Both accounts allow your money to grow tax-free. In 2021, you can contribute up to $6,000, the same as in 2020. If you are 50 or older, you can contribute an additional $1,000. (This is the maximum you may contribute to both types.) 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 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 contributions are not tax deductible, Roth IRAs have other advantages:
- You're not required to take distributions from a Roth 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.
- Non-qualified 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 may be the way to go. A Traditional IRA is helpful if you can make contributions that are tax-deductible. This can help you lower your taxes while you are 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 [email protected] and [email protected].