Traditional IRA
When do you pay income tax on the money? You aren't taxed now, but you will be taxed on the original contribution and on any earnings when you withdraw.
What's the upside? Any money you put in reduces your tax bill at the end of every year. Depending on your tax situation, that could come in handy.
What's the downside? If you're in a higher tax bracket when you start withdrawing, you end up paying even more in taxes in the long run.
When can I start withdrawing money? After 59 1/2 and before 70 1/2.
What if I need the money earlier… If you need the cash and withdraw it before 59 1/2, you'll pay a 10% penalty, plus income tax.
…and have a good reason? You're allowed to withdraw money from either type of IRA without penalty if you meet certain exceptions, such as becoming disabled, paying for college, or buying a first home. For the full list of exceptions, go to 1.usa.gov/1gwEb59.
Do I make too much money to have one? There are no income limits for traditional IRAs.
Roth IRA
When do you pay income tax on the money? You pay the tax on your income before contributing to the IRA.
What's the upside? When you start withdrawing, you won't have to pay taxes on those withdrawals, or their earnings (as long as you meet a few requirements).
This makes ROTHs popular for younger people, because it's likely that you make less income now and are in a lower tax bracket than you will be when you're older. So you'll pay less tax in the long run.
What's the downside? If you're making more money now than you expect to when you retire, then a ROTH might increase your total taxes.
When can I start withdrawing money? After 59 1/2 and before 70 1/2, as long as you've had the account for at least five years.
What if I need the money earlier… If you need the cash and withdraw it before 59 1/2, you'll pay a 10% penalty.
…and have a good reason? You're allowed to withdraw money from either type of IRA without penalty if you meet certain exceptions, such as becoming disabled, paying for college, or buying a first home. For the full list of exceptions, go to 1.usa.gov/1gwEb59.
Do I make too much money to have one? Only if you make more than $125,000 (single) or $182,000 (married and filing jointly).
Community Financial is here to help you navigate the world of IRAs. It’s always a good idea to consult your tax advisor before making an investment as everyone’s situation is unique.
