Roth vs. Traditional IRA: Deciding where you want the tax benefit
Planning for Retirement Is a Lifelong Process
When it comes to retirement planning, there are multiple ways for education professionals to save. While there is no standard investment model that fits everyone’s financial goals, not knowing where or how to save, may be the biggest obstacle.
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For Starters, Just Start
No matter your age or financial situation, one of the most important steps in planning for retirement is to start. The earlier you start, the more time your money has to grow, and the better off you will be.
In this example, a $2,000 annual contribution - or roughly $167 a month - is growing at a hypothetical 5% rate of return. You can see the difference that time, one of the most important factors, can make on the investment.
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Understand Your Options
Even if you’re already contributing to an employer-sponsored plan, an Individual Retirement Account (IRA) allows you to do additional planning, while also potentially saving on taxes. Keep in mind, tax deductibility of an IRA may not be available for everyone. Please consult your tax advisor to learn more on tax deductibility.
Three Questions to Ask Yourself Before Investing
1. When do you want the tax benefit? Now or when you retire?
2. How much do you need to save annually?
3. What kind of flexibility are you looking for in your investment?
Comparing a Traditional IRA and Roth IRA
Traditional and Roth IRAs allow you to save money for retirement and offer significant tax benefits. IRAs can be opened and funded without any employer involvement. The major difference in these two types of IRAs is deciding when you want the tax benefit: when you contribute or at retirement when you withdraw the money.
Choosing the Right Account
To help decide which type of IRA to open, ask yourself where you expect to be when you start taking withdrawals. Do you expect to be in the same tax bracket, or do you anticipate being in a lower or higher tax bracket?
Benefits of Contributing to a Traditional IRA
- Contributions may be tax deductible
- Reduce taxable income and grow earnings tax deferred
- Eligibility not limited by income
Benefits of Contributing to a Roth IRA
- No age limit to open or contribute to account
- No required withdrawal age
- Qualified withdrawals are tax free
Fund Your Future
When it comes to investing, time is important. There is no one right investment strategy for everyone, but the most important thing is to start investing now.
For more information about planning your retirement, reach out to your American Fidelity Account Manager or learn more about retirement savings.
This blog is up to date as of January 2024 and has not been updated for changes in the law, administration or current events. This information is intended to be educational. It is general in nature and should not be considered financial, legal or tax advice. Consult an attorney or a tax professional regarding your specific situation.
