IRA—those three little initials can play a big role in your retirement savings plan. That's because they protect you from three other little initials: IRS. If you haven't already included an individual retirement account in your retirement savings plan, you're missing out on a great way to save for your retirement dream and reduce your tax bill as well.
Before you run out to open an IRA, decide which one (traditional or Roth) is right for you.
A Traditional IRA:
- Permits contributions up to age 70 1/2 if you have earned income
- Provides a current tax deduction for eligible participants (the IRS subsidizes your savings!)
- Allows investment earnings to grow tax-deferred (distributions will be taxed at your regular income tax rate at the time of withdrawal)
- Requires distributions to begin by age 70 1/2
A Roth IRA:
- Permits contributions as long as you have earned income
- Allows investment earnings to grow tax-free (there is no current tax deduction on contributions, but distributions in retirement are not taxed)
- Does not require distributions to begin by any particular age (in fact, a Roth IRA can be passed along untouched to your heirs)
Although both IRAs offer tax benefits, the differences between the two can't be stressed enough. The traditional IRA allows federal tax-deductible contributions and tax-deferred withdrawals while the Roth offers federal tax-free withdrawals (but no current deduction). Either way, you win with an IRA!
Learn more about IRAs and retirement options