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You’ve decided it’s time to start contributing to an Individual Retirement Account (IRA),but you’ve heard about traditional IRAs and Roth IRAs and need to know the basic differences between the two, so that you can determine which vehicle is appropriate for you. Here are some of the principle factors to consider:

Age and Income Qualifications

With a traditional IRA, you can make contributions at any time before you reach the age of 70 1/2. There is no similar age limitation for a Roth IRA. To contribute to a Roth IRA, however, your modified adjusted gross income (MAGI) must fall below a certain level:

  • Persons filing single must have had MAGI of less than $133,000 in 2017 and $135,000 in 2018
  • Married couples filing jointly cannot have more than $196,000 in 2017 and $199,000 in 2018

With a traditional IRA, the tax deductibility of your contribution may depend on your income. For 2017, if your MAGI is $62,000 or less (for a single filer), you can take the full deduction for a contribution to a traditional IRA, up to your contribution limit. If your MAGI exceeds $72,000, you won’t be allowed to take any deduction. If your income falls in between those amounts, you’ll be allowed a partial deduction. Joint filers will lose the deduction if MAGI exceeds $119,000, but will retain the entire deduction if MAGI is $99,000 or less.

Tax Benefits

While both traditional and Roth IRAs provide tax benefits, the timing of the tax advantages differs. With a traditional IRA, you claim the tax break in the year you make the contribution, but must pay taxes when you take a distribution. With a Roth IRA, it’s the other way around—there’s no tax deduction at the time of contribution, but all withdrawals and earnings are essentially tax-free. The tax benefits apply to both state and federal taxes.

Mandatory Withdrawal of Funds

You must start taking distributions from a traditional IRA once you’ve reached the age of 70 1/2. With a Roth IRA, you don’t ever have to take a distribution and can use them to transfer wealth upon your death. Your heirs will enjoy the same tax benefits you would have received. There will be no income tax consequences for a withdrawal.

Content in this material is for general information only, and not intended to provide specific advise or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

Contact The Pinnacle Financial Group

At The Pinnacle Financial Group, we’ve provided trusted investment advice to individuals and businesses in New York and Connecticut for two decades. We understand the critical role that careful planning takes in preparing your financial future for you and your family. We’ll carefully explain the different strategies available to you, as well as your options, so that you can make educated decisions about your future.

To schedule a free initial consultation, call our offices at 516-763-9700 or complete the form provided.

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