Understanding your retirement options


In an increasingly uncertain world it’s more important than ever to put some funds by for a happy and fulfilled retirement. There are many tempting offers around, all promising that the saver will be able to enjoy a prosperous retirement through the use of specific Individual Retirement Accounts (IRA). However, the main dilemma is whether to save with a traditional scheme or invest in a Roth IRA, named after Senator Roth and introduced in 1997.




The main difference between a Roth IRA vs traditional IRA is that the saver enjoys tax savings on contributing to a traditional scheme, only paying it when withdrawing their retirement savings, while in the case of a Roth IRA, the savings are tax free on withdrawal, but contributions to the scheme will be taxed. It’s a little bit like looking into a crystal ball, because the saver should also try to determine if they’re going to be in a lower or higher tax bracket on retirement. Those who estimate that their tax bracket will be lower than in their working life should opt for a traditional scheme, whereas those who believe that their future income and therefore tax bracket will be higher should use a Roth.




Most savings schemes that take advantage of tax allowances do have certain eligibility rules. A traditional IRA stipulates that there are no limits on a family’s income; however, the maximum that can be saved with these scheme is between $5,000 and $6,000 annually for those who are 50 years and older.  With a Roth IRA the Adjusted Gross Income (AGI) figure for the single person must be below $125,000, while for joint income the figure must be below $183,000.




The rules differ between the two types of schemes when it comes to enjoying the benefits of the IRA.  Savers, who have opted for a Roth scheme, can opt not to make any withdrawals at all during their lifetime and the plan can be inherited, tax free, by anyone nominated in their will. A traditional IRA can also be passed on to beneficiaries, though in this case the beneficiaries will have to pay tax on their inheritance. In addition, a traditional IRA stipulates that distributions to the saver have to start at the age of 70.5 years. Both schemes allow the saver to start making withdrawals at the age of 59.5 years. A major benefit offered by both schemes is that up to $10,000, tax free, can be withdrawn to be put towards first time homebuyer expenses. With a Roth account, withdrawals can commence at the age of 59.5 years, though the regulations state that the account must have been held for at least five years before it is possible to take advantage of the tax-free allowances. IRS rules are complex and in these uncertain times Federal regulations and inflation figures change, so if the saver is in any doubt about which option is best for their specific circumstances they really should consult an expert.