Investing in Your Future: Traditional IRA vs Roth IRA

Traditional

Both traditional and Roth IRAs offer their own unique options for growing your money.

As of now, military members with at least 20 years of service qualify for a 50-percent pension plan upon retiring, but for many service members, this alone will not guarantee a comfortable lifestyle. It is important for military members to explore alternate retirement strategies in conjunction with military-based plans.

Establishing an individual retirement account (IRA) is a smart decision for military members. However, there are two versions, a Traditional IRA and a Roth IRA, both with their own unique advantages and disadvantages.

Understanding a Traditional IRA

A traditional IRA is a personal savings account that offers a tax deferred contribution system. Depending on your income level, contributions to a traditional IRA may be tax deductible.

When deciding to open a traditional IRA account it’s important to understand the rules involved:

  • There is a limit to how much you can contribute to your IRA annually. The current limit is $5,000
  • There is no limit on how much you can earn and still contribute to a traditional IRA
  • Investment earnings will not be taxed until you withdraw them; early withdrawal may result in a 10 percent penalty
  • With a traditional IRA you must begin receiving a disbursement of funds by April 1 of the year after you turn 70

Investors who decide on a traditional IRA intend to capitalize on the plan’s tax deferred earning potential. This strategy rests with the belief that upon retirement you will be in a lower tax bracket and owe less than you would have initially.

The Roth IRA

The Roth IRA operates differently than its traditional counterpart. Contributions to a Roth IRA are not tax deductible, but distributions, including contributions and earnings, can be withdrawn tax-free and without a penalty at age 59.

Opening a Roth IRA can be especially beneficial for military members. The 2006 Heroes Earned Retirement Opportunities Act allows service members to contribute untaxed combat pay to an IRA.

Military members can establish a Roth IRA if their adjusted gross income is less than $110,000 for single filers and $160,000 for joint filers. Generally, contribution limits are the same as a traditional IRAs.

Photo courtesy 401(K) 2013