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Roth IRA and Traditional IRA

Roth IRA and Traditional IRA are two types of individual retirement accounts available in the United States.

The main difference between the two is the way they are taxed. With a Traditional IRA, you can make contributions on a pre-tax basis, which means that the money you contribute is not taxed until you withdraw it in retirement. At that point, the withdrawals are taxed as ordinary income. On the other hand, with a Roth IRA, you contribute after-tax dollars, meaning that you pay taxes on the money you contribute upfront. However, when you withdraw funds from a Roth IRA in retirement, you do not have to pay any taxes on the earnings or contributions.

Another key difference is that there are income limits for contributions to a Roth IRA, whereas anyone with earned income can contribute to a Traditional IRA. In 2023, the income limit for contributing to a Roth IRA is $140,000 for individuals and $208,000 for married couples filing jointly.

Finally, Traditional IRAs require you to start taking Required Minimum Distributions (RMDs) once you reach age 72, whereas Roth IRAs do not have any RMDs.

Ultimately, the decision of which type of IRA to choose depends on your individual financial situation and tax situation. It’s recommended to consult with a financial advisor or tax professional to help determine which IRA is best for you.

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