Making financial decisions about your retirement can be confusing and overwhelming. There are so many options to choose from. When looking at IRA retirement solutions, which is better-the Roth or traditional IRA? To understand the difference between tax money that grows tax-free and pre-tax money growing tax-deferred, be smart and exercise your due diligence by consulting an expert. Here, David Moore, with IRA Advantage, explains the difference between these two distinct investment vehicles.
Watch, Listen or Read Roth vs. Traditional IRA
Why should I consider a Roth versus traditional IRA?
It’s critical to understand the difference between the two.
A Roth IRA is taxed money that grows tax-free through the investment cycle. Taxes are paid on contributions. No tax is paid on withdrawals in retirement. There are no limits as to how long funds can be left in the account.
A traditional IRA is pre-tax money growing tax-deferred. Contributions are tax deductible. Tax is paid when you take distributions in retirement. Fund withdrawals must start before age 70 ½.
A Roth is a great situation when you’re buying something that’s going to have explosive growth. One of the custodians tells a story of somebody starting a tech fund for $10,000 with a Roth and selling it for a billion dollars. What was the tax on that disposition? Nothing, it was taxed money growing tax free. It doesn’t get better than that!
If you’re looking at converting, you need to evaluate the investments, what’s happening with them, what you anticipate happening, how old you are, and so forth.
When should I consider a Roth versus traditional IRA?
If you’re young, you’re growing the account, or if you’re buying something that’s going to have explosive growth, a Roth is a great situation for you.
If you are in your sixties, your choices are between using traditional money, converting to a Roth, or just simply taking that money out. At age 59-1/2 you can take in service distributions without a penalty. But to make the choice, you really must look at the asset and decide if you want to do a conversion from traditional to Roth and still have all the strings that are attached with a retirement account, or simply do a distribution of the asset and pull it out.
This decision requires sharpening your pencil, working with your tax people, figuring out what the tax ramifications are, and knowing when to do it. If you’re going to make these conversions or take distributions, there is always tax planning to do. (Note: Tax reform changed little with regard to these investment vehicles.)
The big question on every investor’s mind is this: How do you get the money out with the least possible tax exposure?
How do they compare as IRA retirement solutions?
Traditional and Roth IRAs both provide generous tax breaks, but they are claimed at different times look to our quick comparison chart to learn more.
Roth versus traditional IRA quick comparison:
Roth IRA
- Restrictions: There are no age restrictions with a Roth, but there are income eligibility restrictions (call us for details).
- Withdrawal: Roth IRAs don’t require any withdrawals during the owner’s lifetime, which makes them a great way to transfer wealth.
- Taxes: There are no tax breaks for contributions to Roth IRAs, but the earnings and withdrawals are generally tax-free.
Traditional IRA
- Restrictions: Anyone with earned income who is younger than 70.5 years old can contribute to a traditional IRA.
- Withdrawal: Regardless of whether you need the money, traditional IRAs require investors to begin taking minimum distributions at age 70.5.
- Taxes: Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution; in retirement, withdrawals are taxed at your ordinary income tax rate.
Are there any specific considerations regarding investment real estate and Roth IRAs?
A critical consideration with a real estate investment property, is that it’s leveraged.
Someone enter into a Roth conversion thinking, “I won’t have any tax exposure on this property, period.” But, if you’re flipping properties, you’re going to have some tax subject to UBIT (Unrealted Business Income Tax) or UBTI (Unrelated Business Taxable Income).
Another common question is, ” If you have a leveraged investment, number one, can you finance a property owned by a retirement account?”
The answer is yes, but it has to be a non-recourse IRA compliant, IRA 401K compliant loan. Even with Roth IRAs, you will have tax exposure on the debt-financed income or gain. What that means is you have exposure on any income or gain attributable to that loan.
You might want to consider a 401K plan when dealing with investment properties, as you don’t have that with that debt-financed income or gain.
There’s are big differences between investment vehicles and the experts at IRA Advantage can help you choose the one that is right for you. Call today 800-475-1031.
I work for Federal Government
I have Traditional IRA . I am 58.
Shell I convert to Roth IRA?
It depends what you what your goals are. When do you plan on retiring?
I have tradition IRA but Iam not 59 haft yet .Now I need some money from my IRA . I wonder how much tax and penalties I have to pay when I withdraw some money from my IRA. Sincerely thanks van
Van, at your age you’re going to be paying normal income tax on any distribution and there will be a penalty on top.
Van, you can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make “qualified distributions” in retirement, you must be at least 59½ years old, and at least five years must have passed since you first began contributing.
You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½, unless it’s for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after the conversion.
Not sure whether the money will be counted as contributions or earnings? Well, the IRS views withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let’s say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000. Give us a call for more info @ 503-635-1031!
I’m retiring as of July 1, 2019 and I want to take my lump sum and put it in a it’s and take out money after. I’m 66 years old, please advise
Gloria, after retirement you are free to roll your plan into an IRA. And at your age, you are free to take distributions as you choose without penalty!
Is there a reason for an early withdraw from is Roth more flexible on age than a traditional IRA.