Which IRA Is Right For You?

 |  General Self-Directed IRAs
IRA is right for you

By J.P. Dahdah, Founder & CEO of Vantage

Sooner or later, you realize if your goal is to be financially independent by your chosen retirement age during your wealth accumulation years, establishing an Individual Retirement Account is a no-brainer. 

The challenge then becomes selecting the appropriate type of IRA based on your financial objectives.  To simplify your selection process, begin by asking yourself the following question: “Am I an employee or an employer?” 

If you are an employee, you have a list of two types of IRAs from which to choose, a Traditional IRA or a Roth IRA.  The primary difference between these two IRAs is the deductibility feature related to annual contributions and the tax implication upon distributions from the account.  I’ve outlined several key differences between these two account types to help you evaluate the advantages and disadvantages.

Roth IRA

Tax-Free Earnings Growth:  You don’t ever pay income taxes on any withdrawal from a Roth IRA provided you hold your Roth IRA for at least five calendar years, and you are at least age 59 ½, become disabled, purchase a home for the first time, or die.

Who is Eligible in 2019? 

Single individuals can make a full contribution of $6,000 ($7,000 if you are 50 years old or older) if your modified adjusted gross income (MAGI) is below $122,000. 

If you earn between $122,000 and $136,999, you can make a partial contribution. 

If you are married and filing jointly, and your MAGI is less than $193,000, you and your spouse can make a full contribution.  If your joint income is between $193,000 and $202,999, you can each make a partial contribution.

No Age Restrictions on Contributions and Distributions:  You can continue to make annual contributions to your account after the age of 701/2 as long as you have income within the limits listed above.  And you are not required to start taking minimum distributions when you reach age 701/2.

You must have “earned income,” which is essentially income from employment or self-employment. 

Traditional IRA

Tax-Deductibility:  Your contributions may be fully or partially tax-deductible, depending on your income level and your participation in an employer’s retirement plan.  You must have “earned income,” which is essentially income from employment or self-employment. 

If you and your spouse work but do not participate in an employer retirement plan – no matter what your income is, each of you may deduct the full $6,000 amount of your contribution from your taxable income. 

If you are married (filing jointly), but an employer’s retirement plan covers only one spouse, the spouse not covered can deduct the full contribution if your joint modified adjusted gross income is below $193,000.  A partial deduction may be taken if your joint modified adjusted gross income is between $193,000 and $203,000. 

Suppose you participate in an employer’s retirement plan, but your goal is to invest in non-traditional assets not offered by your employer. In that case, you are still eligible to make a full or partially deductible contribution to a Traditional IRA if your modified adjusted gross income is below the IRS limits.  For the 2021 tax year, the limit for a full deduction is $64,000 (single) and $103,000 (married, filing jointly). 

Both types of accounts offer tremendous wealth-building advantages, but the primary objective is to choose the plan that can help you manage the impact of your tax situation today and in the future.  As always, we encourage you to meet with your tax advisor to analyze your financial situation and retirement goals to determine the best IRA solution for you.  Remember, all types of IRAs (i.e., Roth, Traditional, SEP, SIMPLE, Coverdell) allow you to invest in non-traditional alternative investments and are not limited to stock market based financial instruments.  Select the one that best fits your needs and begin to Self-Direct your future with Vantage!

Happy alternative investing!

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