Putting together a sturdy retirement plan requires making and then challenging many assumptions about the future. The younger you are, the more abstract those assumptions can seem: For a 30-year-old, predicting what the tax rate might be in 40 years can be daunting. But understanding some basic traditional and Roth IRA rules can help you make the best choice for your situation.
Roth IRAs Provide a Future Tax Advantage.
With a traditional individual retirement account (IRA), you typically gain an immediate tax advantage from your contributions. With a Roth IRA your initial contributions are taxed, but your withdrawals in retirement are tax-free. Your decision between a traditional IRA and a Roth IRA depends on where you think tax rates are likely to be a few decades down the line. "When I talk to clients, I often offer the case of my beloved Oakland, California," Timothy R. Yee, the chief retirement specialist at Green Retirement Plans in Oakland, told Ally Bank. "This city, for example, has allocated $4 million of tax money for pothole repair. But it has $26 million worth of potholes to fill! So it probably makes sense to many people that taxes have to go up," he explained. A Roth IRA offers protection against that kind of seemingly inevitable increase. Roth IRAs are generally most advantageous for younger people who currently are in a lower tax bracket than they expect they will be in when they retire. And by putting money into a Roth IRA, in effect, you're locking in current tax rates.
Roth IRAs Offer Flexibility.
People with traditional IRAs are required to take distributions each year, once they pass age 70 ½. The Roth IRA rules don't have that requirement. And although you'll pay a penalty for withdrawing money before age 59 ½ from either a traditional or Roth IRA, you won't be required to pay taxes on the Roth IRA withdrawal. But, as is true of a traditional IRA, there are restrictions on how much you can contribute to a Roth IRA. You're entitled to contribute $5,500 to a Roth IRA each year (or $6,500 if you are 50 or older). Be sure to read the Internal Revenue Service's guidelines for details.
Ally Bank Is Here to Help.
We have IRA products that can help you meet your retirement needs with the kind of flexibility that smart retirement planning requires. For example, with the IRA Raise Your Rate CD, you have the option of a one-time rate increase if our 2-Year CD rate goes up; you have the option to increase your rate twice (two times) if our 4-Year CD rate goes up.
Learn more at Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559).
Ally Bank, member FDIC