Let’s explore some of the differences between a traditional IRA and a Roth IRA. With a traditional IRA, your contributions may be tax-deductible and can grow tax-deferred. In retirement, traditional IRA distributions are taxable as ordinary income. With a Roth IRA, your contributions are non-deductible, but have the opportunity to grow tax free. At retirement age, distributions from a Roth IRA are tax free. Here is a list of some of the primary differences: Traditional IRA Roth IRA Tax Treatment of Contributions: Tax-deductible Non-deductible Tax Treatment of Distributions: Taxable as ordinary income Tax free Mandatory Distributions: Mandatory at age 70.5 No mandatory distributions Early Withdrawal Penalty: 10% on entire amount 10% only on earnings Although the above table highlights some of the major differences between a traditional IRA and a Roth IRA, there are a number of other nuances not reflected. Please feel free to contact us to discuss which makes the most sense for your financial situation.
Assets in a Traditional IRA or 401(k) grow tax-deferred and distributions are taxable at ordinary income tax rates. A Roth IRA grows tax deferred and distributions are tax free. By converting your assets to a Roth IRA, you'll be paying your tax liability now - at a potentially lower rate-in exchange for tax-free growth and tax-free distributions in the future. If you make the conversion in 2010 you can spread the tax bill out equally over two years (your 2011 and 2012 tax returns). This special two-year provision is only available to conversions made in 2010. Unlike a traditional IRA, the government does not mandate you take required distributions from a Roth account. Therefore, you can let the entire account grow tax-deferred for as long as you wish. If you have enough wealth to be concerned about estate taxes, converting to a Roth may provide an additional benefit to you. There are other issues to consider before deciding if converting is right for you. A good place to start the conversation is to talk with your financial advisor. If you do not have an advisor or are thinking about hiring a new one, I’d love the opportunity to visit with you.