The Difference Between a Traditional and Roth IRA

What is the difference between a Traditional and Roth IRA?

David Murphy, VP of Finance and Risk, explains the difference between a Traditional and Roth IRA, and how MMCCU can help with this complicated subject….

While on the surface it may appear Traditional and Roth IRAs (Individual Retirement Accounts) are the same product, the main difference between the two lies in the tax treatment for both products.

Contributions to Traditional IRAs may be subject to special tax treatment under the IRS rules including eligibility for a tax deduction.  Contributions to Roth IRAs are not deductible.  With both IRAs, there are limits to how much and if you can contributed based on your adjusted gross income and, in the case of Traditional IRAs, participation in other retirement savings plans.  There is also a difference in when you must take distributions from your IRA depending on if it’s a Traditional or Roth IRA.

While Roth IRAs do not require you to take distributions upon reaching a certain age, owners of Traditional IRAs must begin taking an annual Required Minimum Distributions no later than April 1 in in the year following when you turn 72.

The qualifying age recently changed with the passing of the Further Consolidated Appropriations Act of 2020, which contained provisions for the SECURE Act signed into law by President Trump on December 20, 2019.

Who benefits most from each type of IRA?

While both types of IRAs have their advantage, the best way to determine which product works best for your financial situation is to talk to your tax advisor or financial planner to truly understand the nuances of each product.  While we can offer IRA accounts and provide general information, we cannot offer tax advice.

In general, contributing to an IRA allows you to grow money earmarked for retirement tax-free until distribution.  There are exceptions the IRS provides to when distributions from your IRA may be penalty-free, and again, your tax advisor would be the best resource to provide that guidance to you.  One caveat for a Roth IRA is you may take distributions anytime tax and penalty free provided the amount is equal or less than your contribution.

How can MMCCU help with IRA’s?

We provide Traditional and Roth IRAs to our members looking to build up their retirement savings outside of what they may already contribute to a 401(k) or 403(b) plan.  We offer liquid IRA savings accounts and IRA certificates, and depending on when/if you would need to access the funds in your IRA, both the liquid IRA savings and the term IRA certificates have their advantages.

We also coordinate Required Minimum Distributions (RMDs) and ensure they are handled properly for our members required to take money from their IRA accounts.  If you’re close to retirement, one consideration for members is to request a 401(k)/403(b) to IRA direct rollover, which would remove your funds with your work retirement plan and deposit the funds at the credit union.

As a federally-insured financial institution, the deposits of our members are insured up to $250,000 (more depending on the type of account), so you can worry less about the safety of your retirement funds if they are deposited with us.  Our financial service officers are ready to address your needs and help assist in setting up your IRA today.

We also work with FocusTax Solutions out of Brookfield.  Their representative, Kenneth Courts, is on site during the tax filing season to file tax returns for our members, but he can also provide financial guidance and the impact a change to your finances can have on your overall tax liability.

Remember, it’s never too late or too soon to start saving for retirement! For more information, contact MMCCU at (715) 387-8686.