Understanding the Difference Between Traditional and Roth IRAs

When planning for retirement, choosing the right Individual Retirement Account (IRA) can significantly impact your financial future. At The Bank of Elk River, we want to help you make informed decisions. Let's explore the key differences between Traditional and Roth IRAs.

Tax Treatment
Traditional IRA:

• Contributions are made with pre-tax dollars, meaning you can deduct them from your taxable income for the year.
• Taxes are deferred until you withdraw the funds during retirement, at which point both contributions and earnings are taxed as ordinary income.

Roth IRA:

• Contributions are made with post-tax dollars, so there's no immediate tax benefit.
• Withdrawals during retirement are tax-free, including both contributions and earnings, provided certain conditions are met.

Eligibility and Contribution Limits
Traditional IRA:

• Anyone with earned income can contribute, but the tax deductibility may be limited based on your income and whether you or your spouse are covered by a retirement plan at work.
• Contribution limits are $7,000 per year, or $8,000 if you're age 50 or older. (Source)

Roth IRA:

• Contributions are subject to income limits, whether you are covered by a retirement plan at work, and your tax filing status. Consult a tax advisor to determine your deductible amount and learn more at https://www.irs.gov/retirement-plans/roth-iras. 
• Contribution limits are the same as for Traditional IRAs.

Withdrawal Rules
Traditional IRA:

• Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty, along with income taxes.
• Required Minimum Distributions (RMDs) must begin at age 73.

Roth IRA:

• Contributions can be withdrawn at any time without taxes or penalties.
• Earnings can be withdrawn tax-free after age 59½, provided the account has been open for at least five years.
• No RMDs during the account holder's lifetime.

Choosing the Right IRA for You

The choice between a Traditional and Roth IRA often depends on your current and expected future tax situation. If you anticipate being in a lower tax bracket during retirement, a Traditional IRA might be beneficial. Conversely, if you expect to be in a higher tax bracket, a Roth IRA could offer greater tax advantages.

At The Bank of Elk River, we are here to help you navigate these choices and plan for a secure retirement. Contact us today to discuss your options and find the best IRA for your needs.

Take Advantage of Our IRA Special
At The Bank of Elk River, we're excited to offer a limited-time IRA special rate to help you maximize your savings and secure your financial future. With competitive interest rates and various terms designed to fit your financial goals, now is the perfect time to open an IRA.

Contact one of our friendly personal bankers today to get started!