The Employee Retirement Income Security Act of 1974 established the financial instrument of the traditional IRA. Described as "the biggest tax break in history" for U.S. citizens, the retirement plan offers tax advantages for citizens with an active income – which is the only prerequisite they must fulfill. The greatest advantage of a traditional IRA is the tax-deductible IRA contributions. But as great as these are, they come with strict requirements regarding filing status, income, and other IRS-mandated savings plans. The IRS has laid out extensively detailed instructions on deduction and contribution limits, single and married filing, and many other cases.
Transactions such as capital gains, interest, or dividends within your traditional IRA are tax-free.
Originally called Regular IRAs, these accounts have contribution limits, but contributions aren't taxed – only withdrawals are. There are also early withdrawal penalties which typically add up to an extra 10%, on top of the income tax which you have to pay when withdrawing money.
Contribution limits have grown over time to reflect increases in inflation. As of 2021, if you're under 50, you're allowed to put $6,000 annually into your traditional IRA. A catch-up mechanic is incorporated into the accounts for first-time investors over 50 to be able to accumulate a meaningful amount for their retirement. They are allowed an additional $1,000 per year in contributions.
Required minimum distributions (RMDs) are obligatory withdrawals that start as soon as the beneficiary of the traditional IRA turns 72. Starting on April 1st of the following year, you must make minimum withdrawals from your account – which are subject to income tax regulations in line with the beneficiary's tax bracket.
There are no income limits regulating the eligibility for traditional IRAs. But there are income limits at play for tax-deductible contributions to the account.
From a historical perspective, the Roth IRA was initially supposed to update the traditional IRA. From today's perspective, it is an alternative that you can choose for your retirement planning. CARL has compiled the key differences between the two retirement plan types in the following chart:
|Am I required to take money from the account at a certain age?
|When you reach age 72, you must withdraw the required minimum distributions the following year by April 1st and every year after that.
|Original IRA owners don't have to take distributions, regardless of age. Other beneficiaries, however, may have to.
|How does taxing distributions work?
|Distributions are subject to taxes as ordinary income. Non-deductible contributions may only be partly taxable.
|Roth IRA distributions are never taxed as long as certain criteria are met.
|Is there a form I have to file for receiving distributions?
|Yes, form 8606 to be precise – if you have made a non-deductible contribution prior.
|Also, form 8606, if you have benefitted from distributions made from a Roth IRA.
The two major differences are found in the areas of taxation and contributions. Which of these fits best to your financial goals is a very personal decision that you should not make lightly. Consulting a retirement plan specialist to help you find the perfect fit is always a good idea.
Investing your money in an IRA – whether it's a traditional or a Roth one – is a viable option to generate more wealth for your retirement. Unfortunately, the Internal Revenue Service has few guidelines on which investments are allowed and they remain rather vague on the subject. You are prohibited from investing in two types of traditional investments, as per IRS rules: life insurance and collectibles. The latter term sums up a couple of different types of investments, such as:
- alcoholic beverages
IRAs mainly allow you to invest in traditional options, such as stocks, bonds, mutual funds, and ETFs. There are a couple of exceptions for collectibles which are viable investments for IRA assets like certain types of U.S. gold coins – one, one-tenth, one-quarter, and one-half ounce ones from the Treasury Department's minting. Certain bullions made of platinum, palladium, silver, and gold can also be invested in. To invest in many high-yielding alternative investment opportunities, you should consider turning your IRA into a self-directed IRA.
CARL provides you with highly liquid quant hedge fund strategies that offer 15%+ targeted returns, as well as self-directed IRAs. There are various strategies available for accredited investors to choose from. Whether it be a long or short-term, higher risk and higher return or lower-risk, lower-return strategy – you can choose whichever one fits your portfolio and suits your financial goals.
There is no clear answer to this question, depending on your filing status, income, and general financial prosperity. Both variants offer significant advantages. A Roth IRA is more beneficial for investing, though, as earnings made from it can be withdrawn penalty- and tax-free. No matter which type of IRA you're interested in, you'll find self-directed IRAs as well as sophisticated quant hedge fund strategies at CARL. Invest today to make sure you're financially stable in the future.