Differences between Traditional Retirement Accounts and New Retirement Accounts
The differences between these two accounts focus on when you pay taxes on your contributions and when you must begin withdrawing them, along with some other requirements.
Tax Benefits
Contributions to a traditional retirement account are tax-deductible at the time you make them, but taxes must be paid when withdrawing funds during retirement. High-income retirees may prefer the traditional retirement account over the new retirement account because they benefit from tax savings upfront. They will pay taxes when needed in retirement when they are likely to be in a much lower tax bracket.
Tax Deduction Limits
You will have different income limits for obtaining tax deductions for contributions you make to your own or your spouse’s employer-sponsored retirement plan. In both cases, your tax filing status is considered when determining the amount of contribution that can be deducted.
Income Requirements
The new IRA also imposes income limits. Your ability to contribute to the new IRA will be restricted if you exceed these limits, or you may be unable to contribute at all. You will not be able to contribute to the Roth if you have a gross income exceeding $144,000 as an individual contributor, but you can make partial contributions if your earnings are between $129,000 and $144,000. Couples filing jointly will not be able to contribute to the Roth if they earn $214,000 or more, but they can still make partial contributions if they earn between $204,000 and $214,000. These limits are also adjusted for inflation and increase in 2023.
Distribution Rules
One of the biggest differences between traditional retirement accounts and new retirement accounts is that you are not required to withdraw money from your new retirement account at a specific age. You have already paid taxes on the funds, so there is no waiting for the IRS to collect. The government requires withdrawals from traditional retirement accounts because taxes are deferred until the time of withdrawal.
Early Withdrawals
Withdrawals from a traditional retirement account before the age of 59½ can incur a 10% penalty on early withdrawal, but there are exceptions for certain life events. These include permanent disability and educational expenses.
Source: https://www.thebalancemoney.com/traditional-ira-versus-roth-ira-356293
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