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Product Knowledge February Report

February 22, 2024

Traditional IRA vs. Roth IRA

Individual Retirement Accounts (IRAs) are popular investment tools that help individuals save for retirement while enjoying certain tax advantages. Two common types of IRAs are the Traditional IRA and the Roth IRA. Let’s review the key differences between these two retirement savings options to help you make an informed decision based on your financial goals.

Tax Treatment:
● Traditional IRA: Contributions to a Traditional IRA are typically tax-deductible in the year they are made. This means that the money you contribute is not subject to
income tax until you withdraw it during retirement.
● Roth IRA: Roth IRA contributions are made with after-tax dollars, meaning you don't get an immediate tax deduction. However, qualified withdrawals, including earnings, are tax-free during retirement.

Income Limits:
● Traditional IRA: There are no income limits for contributing to a Traditional IRA. However, the tax deductibility of contributions may be limited based on your income and whether you or your spouse are covered by an employer-sponsored retirement plan.
● Roth IRA: Roth IRAs have income eligibility limits. If your income exceeds a certain threshold, you may be restricted or ineligible to contribute directly to a Roth IRA.
However, there are strategies, such as a backdoor Roth IRA, that high-income earners can use.

Age Limits and Required Minimum Distributions (RMDs):
● Traditional IRA: Traditional IRAs require minimum distributions (RMDs) starting at age 73. This means you must start withdrawing a certain amount annually, which is subject to income tax.
● Roth IRA: Roth IRAs do not have RMDs during the account holder's lifetime, making them an attractive option for those who want more flexibility in managing their
withdrawals during retirement.

Early Withdrawals:
● Traditional IRA: Early withdrawals (before age 59½) from a Traditional IRA may incur a 10% penalty, in addition to regular income tax.
● Roth IRA: Roth IRAs allow penalty-free early withdrawals of contributions (but not earnings) at any time. This flexibility can be beneficial in certain financial situations.

Estate Planning:
● Traditional IRA: Inherited Traditional IRAs are subject to income tax when withdrawals are made by beneficiaries.
● Roth IRA: Inherited Roth IRAs generally offer tax-free withdrawals for beneficiaries, making them potentially advantageous for estate planning.

Conclusion: Choosing between a Traditional IRA and a Roth IRA depends on your individual financial situation, goals and preferences. Consider factors such as your current and future tax situation, income level and your withdrawal plans during retirement. It's advisable to consult with a financial and tax-advisor to make the best decision based on your unique circumstances.

Jeff Long | GCU Sales Director

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