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Traditional IRAs vs. Roth IRAs: Why differences matter

Traditional and Roth IRAs both offer tax-deferred growth with important variations.

Two people working on financial paperwork

Both Traditional IRAs and Roth IRAs let your earnings grow tax-deferred until you make withdrawals. However, there are key differences, and it might help to keep them in mind when you're saving for retirement:

Traditional: Contributions may be deductible on your federal income tax return.
Roth: Contributions are not tax-deductible on your federal return, but can be withdrawn anytime, tax-free.

Traditional: There are no income limits for contributions, but there are income limits on deductions. 
Roth: Contributions are subject to income limitations.

Traditional: Earnings are exempt from federal income tax return until withdrawn. 
Roth: Earnings are tax-free for qualified distributions.

Traditional: If you have already turned 70 1/2 in 2019 and have started taking RMD distributions your withdrawals will not change by the new law. However, starting in 2020, RMD must begin at age 72.
Roth: No mandatory withdrawals at any age.

Bottom line

Deferring taxes until the funds are withdrawn in retirement "as in a Traditional IRA" may make sense if you think your income will be lower. But this isn't always the case. In fact, your retirement income could be higher, especially if you save a lot and also collect Social Security. To keep your retirement tax burden in check, a combination of Traditional and Roth IRAs may be something to consider.

Neither State Farm nor its agents provide tax or legal advice.



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