Question

1. What type of person would benefit from choosing a traditional IRA instead of a Roth IRA? When you are 25 years old, which IRA do you think will make more sense for you? Why?

Answer 1

IRA's abbreviated as Individual retirement account is a form of retirement plan providing tax advantages for retirement savings.

IRA can be of three types:

1 Traditional IRA

2. Roth IRA and

3. Non deductible IRA

The basic difference between traditional IRA and Roth IRA are explained below.

Any contributions made by a person to a traditional IRA can be taken as a deductible contribution and can be taken as an item of deduction from income. Also, any distributions which are received by the person once he reaches the stipulated age of distribution , all such distributions are taxable.

Whereas under a Roth IRA , any contribution made by the person is not a deductible adjustment . Similarly , any contributions received are non taxable and are not mentioned by the person on his Individual Tax Return

A person who wants to claim certain deductions on his income tax return will benefit by contributing to the traditional IRA as any contribution made to this type of IRA is a deductible adjustment.However, it should be noted that any distributions received from the Traditional IRA in the future will be fully taxable.

A person who does not want to claim any deductions may opt for contributing to A Roth IRA as contributions made to these IRA's are non tax deductible and apart from that also benefits received from these IRA would not be taxable in the future.

A person who is 25 years of age will make much sense if he starts contributing to the Roth IRA since he has several years to contribute which will result in huge accumulation of funds and when these funds are distributed to him/her once he reaches the distribution age limit that is 59.5 years , these funds will be tax free compared to a traditional IRA wherein the distributions from IRA are taxable, the individual has to pay a lot of taxes on these distributions.

Also it should be noted that the combined limit for contribution to both the IRA's is $ 6000 as per 2019 IRS rules and any contribution beyond that cannot be claimed as a deduction to income.