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IRAs were designed to help investors save for retirement while gaining tax and other benefits along the way. Whether you choose a Traditional IRA or a Roth IRA, you'll find each offers advantages before and after you retire. These benefits are the same if you choose one of our Brokerage IRAs.
Traditional IRAs work well for some investors because the contributions are generally tax deductible. Here are some reasons why investing in a Traditional IRA may make sense.
All or some of your contributions may be tax deductible on your income tax return. Tax-deductibility is based on your:
Learn more about the IRA tax deduction rules. You can also calculate how much of your contribution may be tax deductible with the IRA Eligibility Analyzer .
Generally, any earnings grow tax deferred and are taxed at your ordinary income tax rate at the time of withdrawal. You don't pay income tax on Traditional IRA earnings until you make withdrawals. Each withdrawal can contain tax-deferred earnings and tax-deductible contributions, both of which are taxed as ordinary income based on your tax bracket at the time of the withdrawal. This can be an added benefit if you are in a lower tax bracket when making withdrawals, which can be the case if you are retired.
The primary purpose of a Traditional IRA is investing for retirement, but there are ways you can use the money earlier. For example, the IRS allows "special purpose" withdrawals under specific conditions, such as buying a first home or paying for higher education. Although these withdrawals are penalty free, any earnings and tax-deductible contributions will be taxed as ordinary income at your current tax rate.
Open a Traditional IRA
Roth IRA contributions, are never tax deductible.1,2 But, there are other benefits, both before and after retirement, that may make this the right IRA for you.
This may be the greatest benefit. If the account is at least five years old and you are at least age 59½, you may withdraw your earnings tax free and penalty free at any time. You may also withdraw contributions tax free and penalty free at any time.1
As with the Traditional IRA, you are allowed to take the same special purpose withdrawals from a Roth IRA under specific conditions.
No Required Minimum Distributions
You are not required to take money out of your Roth IRA at any age. With a traditional IRA, the IRS requires you to take a minimum distribution from your IRA each year beginning at age 70½, or you will owe a 50% penalty tax on the amount you did not take. You also can contribute to a Roth IRA as long as you have earned income.
No Income Tax for Your Beneficiaries
The beneficiaries of your Roth IRA will not have to pay income tax on the assets in your account if it was open for at least five years.1,2
Open a Roth IRA
Call 1-800-345-2021 to speak with one of our Investment Consultants who can help you determine which IRA may be the right choice for your situation.
1State and local taxes may apply.
2Estate tax may apply.
3Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) with standard deductions included.
The answer for which IRA is best for you is not as simple as the "paper or plastic" decision we make all the time at the grocery store. Comparing the two side by side may give you a better understanding of which one may be right for you.
Deductibility depends on MAGI3 and whether you or your spouse is covered by an employer-sponsored retirement plan. You must figure your deduction and your spouse's deduction separately. The deduction for contributions to Traditional IRAs phases out over the following MAGI levels:
The Traditional vs. Roth Analyzer tool may also help you decide which might be right for you.
The following will help you make quick calculations as you make your IRA choice.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.