If you are like a lot of people, you may not know what the difference is between a Roth IRA or a traditional IRA. In today’s financial world, knowing the difference could save you potential headaches and thousands of dollars in taxes down the road. It will depend on your personal situation, and you need a dedicated Financial Advisor like Coach Pete D’Arruda and his team of fiduciaries to help you decide which one is right for you.

IRAs or Individual Retirement Accounts are tax-advantaged accounts designed for long-term savings and investments to help build a nest egg for one’s retirement. While some IRAs are available through work, the two most common are designed for investors to use on their own: the traditional IRA, established in 1974, and the Roth IRA, introduced in 1997. While these accounts are similar, they also differ in some key ways. You need to know what those are in order to determine which one is right for you.

The key difference between Roth and traditional IRAs lies in the timing of their tax advantages: With traditional IRAs, you deduct contributions now and pay taxes on withdrawals later; with Roth IRAs, you pay taxes on contributions now and get tax-free withdrawals later.

Traditional IRAs function like personalized pensions: In return for considerable tax breaks, they restrict and dictate access to funds.

Roth IRAs function more like regular investment accounts, only with tax benefits: They have fewer restrictions, but fewer breaks as well.

Whether you think your annual income and tax bracket will be lower or higher in retirement is a key factor in determining which IRA to choose.

Technically, you don’t have to choose between a traditional or Roth IRA. You can contribute some money to both, but you should favor whichever one you believe will offer you the best tax advantages. Remember to stay mindful of the annual contribution limits as well. You may contribute up to $6,000 to an IRA in 2020 or $7,000 if you’re 50 or older, but this limit applies to all your IRAs, not to each individually. You certainly don’t have to max out your IRA, but doing so is a great way to set yourself up for a comfortable retirement.

To find out more about which type of IRA could benefit you, come in and sit down with one of our trusted advisors and have them help you make the most out of your retirement goals. It’s never too early to start planning and with over 28 years as a Registered Financial Consultant Coach Pete and his team will help take the worry out of your retirement.