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Roth vs. Traditional IRA: Deciding where you want the tax benefit

 

February 06, 2020

3 minute read

Category: Benefits Strategy

Woman on phone with book and coffee

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.

Watch how annuities and retirement savings plans work 

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.


Contribution example showing the benefit of investing early

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.

Use Retirement Savings Calculator

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. When thinking about an IRA, there are a few key questions to ask yourself.

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

TIRA and Roth IRA Comparison GraphFund 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 November 2022 and has not been updated for changes in the law, administration or current events.

  • Tags:
  • Retirement

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