2 things to consider when choosing between IRAs | Smart Change: Personal Finance

Personal Finance / May 26, 2022 / DRPhillF / 0

(Steven Walters)

Choosing between IRAs can be tricky because both have significant benefits. You can’t go wrong with either option because of their tax credits, but it’s mostly about when you want to reap the benefits of the account.

Here are two things to consider when choosing between IRAs.

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1. Your current tax bracket versus your expected tax bracket

When considering a Roth IRA or a traditional IRA, it primarily comes down to your current tax bracket and where you expect your tax bracket to be in retirement. With a Roth IRA, you contribute after-tax money and get your tax-exempt at the back end by maximizing and multiplying your money with tax-free retirement withdrawals. With a traditional IRA, you get your tax benefits on the front end. Even though you technically contribute after-tax money to a traditional IRA, there is a chance that your contributions may be deductible.

As of 2022, the maximum amount you can contribute to an IRA—either Roth or traditional—is $6,000 ($7,000 if you’re 50 or older). How much of your traditional IRA contributions you can deduct depends on your income and whether you are covered by an employer retirement plan.

If you are be Covered by a retirement plan at work, here’s how much of your contributions you can deduct:

Tax filing status	Income	Deduction is allowed
single	$68000 or less	full amount
single	$60,801 to $77,999	partial amount
single	$78,000 or more	Discount is not allowed
Introducing married couples together	$109,000 or less	full amount
Introducing married couples together	$109,001 to $128,999	partial amount
Introducing married couples together	$129,000 or more	Discount is not allowed
Married, registered separately	Less than $10,000	partial amount
Married, registered separately	$10,000 or more	Discount is not allowed

If you’re single and not covered by a business retirement plan, or you’re married, file jointly (with your spouse not covered by a business retirement plan), you can take any amount and get a full deduction.

If you are married and have a spouse that is covered by a business plan, here are the allowed income and deductions:

Tax filing status	Income	Deduction is allowed
Married, presenting jointly (with the spouse who he is covered by business plan)	$204,000 or less	full amount
Married, presenting jointly (with the spouse who he is covered by business plan)	$204,001 to $213,999	partial amount
Married, presenting jointly (with the spouse who he is covered by business plan)	$214000 or more	Discount is not allowed
Married, apply separately (with the spouse who he is covered by business plan)	Less than $10,000	partial amount
Married, apply separately (with the spouse who he is covered by business plan)	$10,000 or more	Discount is not allowed

If you’re at the peak of your career, it’s usually best to take your tax credit now, when it’s most valuable. For example, if you’re in your peak earning years and your current tax bracket is likely to be the highest, you’ll want to consider contributing to a traditional IRA now (taking the deduction if you qualify) and then paying income taxes on your retirement withdrawals When your tax bracket is lower.

If you’re at the beginning of your career and this is likely to be the lowest tax bracket to join, it makes more sense to pay taxes on the money now rather than later when your bracket is higher. You’ll never get out of paying taxes; Uncle Sam doesn’t have it. but you are Could you Be strategic about when to pay, so you can pay as little as possible.

2. If you think you will need the money in retirement

Unfortunately, traditional IRAs have required minimum distributions (RMDs). No matter what, you should start getting distributions by April of the year after you turn 72. If you don’t take your RMD, the amount not withdrawn is subject to a 50% fine – a costly mistake. However, Roth IRAs do not have RMDs; You can keep the money in the account for as long as you choose.

If you can save enough for retirement in other accounts, such as a 401(k), and decide you don’t need the money in your Roth IRA, you can keep the assets there and give them more time to grow and accumulate. In fact, it is not uncommon for people to do this and then pass the account on to their children upon their death. If you think you’ll be financially comfortable in retirement without needing your IRA money, you may want to consider a Roth IRA because it has no RMDs.

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