If you expect to be in a lower tax bracket when you retire, a traditional IRA may make the most financial sense. You’ll get tax benefits today if you’re in the upper class and pay taxes at a lower rate later. The traditional IRA is one of the best retirement planning options. You can open a traditional IRA with a bank or broker, and the investment universe is open to you.
But with this freedom comes responsibility. With traditional IRAs, there are many rules when a rule is broken and you can expect a fine. However, if you follow these rules, you can get a significant portion of the change later on. The traditional IRA offers most people the most benefit because your contributions are tax deductible.
That means you can deduct your contribution from your taxable income, which can reduce your taxes owed for the year. What’s more, the money in your traditional IRA grows on a tax-deferred basis, meaning you don’t have to pay taxes on growth until you withdraw the money in retirement. As a result, traditional IRAs offer an immediate tax benefit (deduction) and a long-term benefit (tax deferral). If you think you’ll be in a lower tax bracket when you retire than you are now, a traditional IRA may be a better choice for you.
This is because distributions from Roth IRAs are tax-free, provided that you are at least 59 ½ years old at the time of withdrawal and the Roth IRA has existed for at least five years. While some traditional IRA contributions may not be tax deductible, there are other reasons to contribute to an IRA. If you’re not eligible to deduct your IRA contributions, you can still stash money up to the annual limit in a traditional IRA. IRA expert Ed Slott walks us through common IRA mistakes and missed opportunities that you can avoid.
With a combination of traditional and Roth IRA savings, you could, for example, take distributions from your traditional IRA until you reach your income tax bracket cap and then withdraw anything you need over that amount from a Roth IRA, which is tax-free, provided certain conditions are met. Traditional IRAs again this year, retirement savers won’t be able to make more contributions to traditional IRAs, but the way they work could change. If you’re eligible to make contributions to one of the IRAs and receive a deduction for traditional IRA contributions, consider what your tax rate could be when you start withdrawing. However, keep in mind that making non-deductible contributions to an IRA will make your life more difficult when it comes to withdrawing money from your IRA.
Non-marital beneficiaries who inherited an IRA — either a traditional IRA or a Roth IRA — after that date must now withdraw the money from the account within a decade.