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Retirement savings plans

The difference between a Traditional IRA and a ROTH IRA

ACU offers savings options for every stage of your financial journey, whether you’re just getting started or ready to step up and earn more. Photo credit: Stock photo

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Retirement savings plans like a Traditional IRA and a ROTH IRA can be confusing, but understanding the difference between these two types of accounts is essential for making an informed decision about your financial future. Let's take a look at the differences between a Traditional IRA and a ROTH IRA and how they can affect your retirement savings plan.

Tax deductions and contributions
The main difference between a Traditional IRA and ROTH IRA is that contributions to a Traditional IRA are tax deductible, whereas contributions to a ROTH IRA are not. This means that if you contribute to a Traditional IRA in the current year, you will be able to deduct that contribution from your taxes when filing that year's taxes. In comparison, contributions made to a ROTH IRA do not qualify for any tax deductions.

Withdrawal age requirements
Another key difference between these two types of accounts is the age requirements for taking withdrawals without penalty. Withdrawals taken before age 59 and a half from either type of account will incur an additional 10% penalty on top of regular taxes due on the withdrawal amount. However, with a Traditional IRA, you must wait until age 70 and a half to begin taking required minimum distributions (RMDs) without penalty; with a ROTH IRA there is no such requirement as long as you have had the account for at least five years prior to taking withdrawals.

ACU IRA accounts
When it comes to setting up a retirement savings with America's Credit Union, you have the choice of an IRA Savings or an IRA Share Certificate. In addition, we offer three options for IRAs including Traditional, Roth and Educational programs. An ACU IRA Savings is a tax favored plan to accumulate retirement funds. An IRA Certificate is an account that allows members to earn higher dividends on their IRA funds, while having the funds "locked up" for a set term.

Both Traditional IRAs and Roth IRAs offer advantages depending on individual circumstances such as income levels and retirement goals. For ACU members who are just starting out saving for retirement or who want more flexibility, Roth IRAs may be the best option; while those who need immediate tax benefits may opt for traditional IRAs instead. No matter which type of account you choose for your retirement savings plan, it's important that you understand all of your options before deciding on which one is right for you.

To learn more about traditional and Roth IRAs - or other types of retirement savings accounts - contact your local credit union today!


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