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Financial Planning for Retirement: Traditional vs Roth IRAs

retirement Sep 02, 2022

Hi All!

Today is all about the pros and cons of Traditional vs Roth IRAs.

First off: The max contribution is $6,000 or $7,000 (if over 50 years old) for both a Traditional and a Roth IRA. Remember that is per person so if you are married you can each have an IRA.


Now for some weird rules! 

The Traditional IRA is suppose to be a Pre tax contribution and the Roth IRA is Post tax contribution. Sort Of....

Everyone can contribute to a Traditional IRA but it IS NOT Pre tax for everyone. The IRS has a special form to fill out every year where they calculate your MAGI (maximum adjusted growth income). This number determines if ALL your contribution, part of your contribution or none of your contribution is a tax write off for your Traditional IRA.


Contributions to a Roth IRA depends on your income.

As of 2022:

Single or married filing separately making under $104,000:         Full Contribution

                               making between $104,000 to $144,000:        Partial Contribution

                                                                      over $144,000:        No Contribution

                      Married filing Jointly making under $204,000:        Full Contribution

                               making between $204,000 to $214,000:        Partial Contribution

                                                                      over $214,000:        No Contribution


There is something called a Back Door Roth that makes it so everyone can take advantage of the Roth IRA. 

How does this work? 

1)  Open a Traditional IRA account and fund it. 

2)  Open a Roth IRA

3)  Transfer the money from the traditional IRA to the Roth IRA. 

Several online brokerages make this really easy to do. Look at Vanguard, Fidelity, TD Ameritrade or whichever appeals to you for options!


Let's talk withdrawals.

Traditional IRA:

If you withdraw prior to 59 1/2 years old you will pay taxes and a 10% fine to the IRS.

If you withdraw after 59 1/2 years old you will pay taxes and this money will be treated as income. This may affect your social security or Medicare payments when you are older depending on the laws at that time.

You are required by law to start taking disbursements starting at 72 years old.

Roth IRA:

After you have owned the Roth IRA account for 5 years you can withdraw your contributions at any time.

If you withdraw any gains from your investments prior to 59 1/2 years old you will pay taxes on your gains and a 10% fine to the IRS.

After 59 1/2 you can withdraw both your contributions and your gains from investments without paying any further taxes. This means it IS NOT counted as income on your tax forms.

           Example: You contribute $6,000 a year for 10 years and invest it in a SP 500 index                           which averages a 8% return yearly. You contributed $60,000 and your investments gained an additional $46,000. You have $106,000 in your account and when you withdraw it you do not pay taxes on any of it!

You are not required to take disbursements over 72 years old. 



That's it for today.

See you next week!


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