What are Traditional and Roth IRAs?

Open to anyone earning an income, an individual retirement account (IRA) is a tax-savvy way to invest for your future, with the two most common being Traditional and Roth IRAs. Both IRAs provide special tax advantages to account holders provided you wait until at least six months after turning 59 to make a withdrawal.

The advantages of a Traditional IRA, with its tax-deferred investment benefits, can be a good choice for investors who:

  • Have limited income to invest now but still want to put aside as much as they can
  • Anticipate being in a lower tax bracket in the future when distributions are taken
  • Want to show less taxable income for the current tax year
  • Aren’t eligible to contribute to a Roth IRA

Roth IRAs have the same contribution limits as Traditional IRAs, but contributions are made using after-tax money. As a result, future withdrawals are completely tax-free as long as your account is at least five years old and you wait until six months after turning 59 to take your first distribution. Roth IRA holders are also not required to take RMDs.

Though contributions are not available to everyone, there are many benefits to a Roth IRA, making them great for people who:

  • Expect their investments to grow considerably
  • Never want to pay taxes on their investments’ gains
  • Anticipate being in a higher tax bracket in the future when they go to take distributions
  • Don’t want to begin taking distributions at age 72

Whether a Roth or Traditional IRA is right for you will depend on your unique financial situation, but both will offer enticing tax advantages over taxable investment accounts.

For this reason, many investors have both Traditional and Roth IRA accounts.

If you’re interested in using tax-advantaged retirement funds to invest in non-traditional assets, a self-directed IRA from Alto may be what you’re looking for.

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