Once someone reaches 59.5, withdrawals from traditional and Roth IRAs are free of the 10% withdrawal penalty. However, in order to avoid the incurrence of tax, Roth IRA owners must ensure that their first contribution was made no less than five years before the date of their first withdrawal.
Additional Benefits
While these differences are a few ways traditional and Roth IRAs vary, there are some other distinctions. For example: Traditional IRA owners below age 59.5 can take up to $10,000 from their accounts, without paying a normal 10% penalty, for certain qualified expenses. These qualifying expenses include a first-time home purchase, higher education, disability, and certain kinds of unreimbursed costs. However, you will pay income tax on the withdrawal balance.
Roth IRA owners are free to withdraw their contribution at any given time without paying any tax or penalty. Roth earnings up to $10,000 can be withdrawn without any penalty before age 59.5 to pay for qualifying first-time home-purchasing expenses. However, this can be done only after five tax years from the initial contribution. Also, Roth IRAs can contain virtually any investment, including individual stocks, index funds, and even alternative investments. On the other hand, traditional IRAs are bound by limits on what asset types in which they may be invested.
Potential Tax Implications
As you think over your retirement configuration, it’s important to consider future tax implications. You will have to pay taxes on withdrawals from traditional IRAs. But converting or opening up a Roth IRA now can be “tax-heavy.” It’s prudent to have honest and frank conversations with a qualified professional about what makes sense for your situation.
With that said, say someone holds both traditional and Roth accounts. One way to mitigate tax burden with RMDs is using qualified longevity annuity contracts. With a proper configuration, you could stretch out your tax liability to as late as age 85.
For older account owners, immediate annuities may also present a more short-term strategy to alleviate the tax liability posed by RMDs. Ask a knowledgeable financial professional for guidance in whether this might be beneficial for your circumstances.
Final Thoughts
While traditional and Roth IRAs are efficient vehicles for retirement income, they are just a few potential sources. Many retirement investors struggle with the uncertainty of knowing how they will meet all of their costs of living, month to month, and be able to enjoy a comfortable lifestyle.
Obviously, there are many things to consider making sure you plan and execute the proper strategy for you and your family. That’s where me and my team at 1st Capital can be your partner to help you build a strong Financial and Retirement arsenal.
Contact: 312-952-8040/Cell * 312-243-3907/Office * [email protected] * www.1stcig.com
Photo Credit Laura Margarita Cedeno Peralta