How to Pick the Right IRA for You | Summary and Q&A

TL;DR

Determine your tax bracket to decide whether a Roth or traditional IRA is best for you.

Key Insights

• 🤩 A dichotomous key can be applied to decide between a Roth and traditional IRA based on income and tax bracket.
• 🚕 In a low tax bracket, a Roth IRA is advantageous for potential tax-free withdrawals in retirement.
• ✋ High-income earners in a high tax bracket may benefit more from a traditional IRA's upfront tax deduction.
• 🥅 The goal is to maximize savings and minimize the amount of taxes paid to the IRS.
• 😵‍💫 Both Roth and traditional IRAs can be held simultaneously, with contributions subject to an annual limit.
• 💄 Certain income levels may restrict eligibility for contributing to a Roth IRA, making a traditional IRA the only option.
• 🥶 The contribution limit for 2016 is $5,500 for individuals under 50, with an additional $1,000 for those 50 or older.

Transcript

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Questions & Answers

Q: How do I decide which IRA is best for me based on my income and tax bracket?

Analyze your tax bracket to determine if you are in a low or high-income situation. In a low bracket, a Roth IRA may be best; in a high bracket, a traditional IRA offers an upfront tax deduction.

Q: Can I have both a Roth and traditional IRA at the same time?

Yes, you can have both types of IRAs simultaneously. The annual contribution limit applies to the total amount contributed to all IRAs.

Q: What is the contribution limit for IRAs?

For individuals under 50 years old, the contribution limit for 2016 is $5,500. If you are 50 or older, you can contribute an extra $1,000, bringing it to $6,500.

Q: Are there any restrictions on contributing to a Roth IRA?

There is an income limit for contributing to a Roth IRA. If your income exceeds a certain amount, usually around $118,000, you may not be eligible to contribute and would need to choose a traditional IRA instead.

Summary & Key Takeaways

• Consider your income and tax bracket when choosing between a Roth and traditional IRA.

• In a lower tax bracket (0-15%), opt for a Roth IRA for potential tax-free withdrawals in retirement.

• In a higher tax bracket (28-39%), a traditional IRA offers an upfront tax deduction but taxes on withdrawals later.