3 factors to consider when planning for an IRA

For either traditional or Roth IRAs, it’s all a matter of how one prefers to be taxed. Generally speaking, the money you deposit in a traditional IRA isn’t taxed that year, and whatever earnings you have on your contributions won’t be taxed until you withdraw that money as a retiree.  So, if you earn $40,000 in one year and put $3,000 of it in an IRA, your taxable income drops to $37,000. The deposit will grow tax-free through the years. If you withdraw any before age 59½, you’ll face a penalty. After that, you can withdraw and the money will be taxed as earned income. Roth IRAs, Exemptions and No RMDs: 

Roth IRA contributions are never deductible. You pay taxes on the money when you earn it, just like any other income. The benefit of a Roth is that when the owners decide to withdraw from it after age 59½, they will not be faced with any taxes. In other words, the Roth offers tax-exempt rather than tax-deferred savings. Also, traditional IRA rules include required minimum distributions (RMDs). With a traditional IRA, you must begin to take RMDs by April 1 of the year following the year you reach age 70.5, but that isn’t the case with a Roth IRA. The Best of Both Worlds?

Naturally, IRA owners want to chart a path in which they’re penalized with taxes the least. It may be possible to cushion one’s retirement savings against future tax increases by converting some of an IRA to a Roth and earn tax-free gains going forward.

“Converting to a Roth will make sense for many people, and if you’re eligible to contribute to both types of IRAs, you may divide contributions between a Roth and traditional IRA,” Lowrey said. “But the total contributions to both must not surpass the limit for that tax year.”