This week, Diane Winner is back to talk about Traditional IRAs and how they differ from the Roth IRAs we discussed in last week's episode.
The biggest difference is that you pay taxes on the way in to a Roth IRA, but on the way out of a Traditional IRA. Diane and Paula break down the pros and cons to each strategy. Also, we talk about the strict penalties that can be levied against you if you do not take required minimum distributions out of your traditional IRA beginning at age 72.
No matter which retirement vehicles you use, the most important thing is to start saving early, and take advantage of compound interest. Paula explains.
Want to know more?
Reach out to Diane Winner at dwinner@boaa.com
To Paula Christine at Paula@PaulaChristine.com
Or visit our website: https://paulachristine.com/
Paula: Hi, I'm Paula Christine, and welcome to Beyond the Paycheck. Living paycheck to paycheck and struggling to get ahead can really suck. What if you could take control of your money and have a life that you dream about? It can happen with knowledge and commitment. That is my goal. To provide you with the knowledge to take control of your money. It's up to you to make the commitment.
So last week we talked to Diane Winner, who's a certified financial planner with LPL about what a Roth IRA is. So I've asked her to come back today and talk about what a traditional IRA is and what are the differences. So welcome, Diane.
Diane: Thank you, Paula. And thank you for inviting me back.
Paula: You had a lot of valuable information last week, so perfect for you to come back and talk about what is a traditional IRA.
Diane: So a traditional IRA is an individual retirement account that grows tax deferred and is a hundred percent taxable to you at the age of 59 and a half.
Paula: Last week, we talked about the Roth IRA. And so this week we're talking about traditional, from what I understand that the traditional IRA, when I make withdrawals at age 59 and a half is a hundred percent taxable where the Roth IRA is a hundred percent tax free. Do I have that correct?
Diane: Correct.
Paula: So what is the major benefit then of the traditional IRA?
Diane: The major benefit of a traditional IRA. It reduces your taxable income today.
Paula: So if I'm just gonna throw out a quick number here. So if my income is $20,000 and I put $2,000 into my IRA, then I'm gonna be taxed on $18,000.
Diane: Correct.
Paula: Perfect. So do I have any contribution limits? Can I put in as much as I want?
Diane: No. Your contribution limits are very similar to the Roth IRA. You can only put in $6,000 on an annual basis. If you're over 50, you can have a catch up of a thousand dollars.
Paula: So if I'm over 50, then I can put $7,000 in. And I am over 50 . So if I have a 401k at work and I'm already contributing to that, can I also contribute to this IRA?
Diane: Depends. Depends on where your taxable income is and your filing status. So if you have too much earned income, You cannot contribute to a
Paula: traditional IRA. So what is a filing tax status?
Diane: Married or single.
Paula: Okay. Are there any other rules that I need to know about?
Diane: Yes. So a traditional IRA is meant for withdrawals after the age of 59 and a half.
If you take withdrawals prior to 59 and a half, you will have a 10% penalty on the money that you withdraw. Plus you'll pay taxes on everything that comes out of the IRA. Think of it like a bucket. Money that you take out will be taxable. Also with a traditional IRA, because it's meant for retirement. And because money that you put into your traditional IRA reduced your taxable income.
At some point you have to pay taxes on it. Uncle Sam will require you to take some kind of required minimum distribution by the time you're 72. Doesn't mean you have to have it emptied out by the time you're 72, you just have to start making some kind of withdrawal.
Paula: So that I understand this correctly. If I put money in, I'm able to access my money without any penalty at 59 and a half. When I do take the money out, it is taxable to me. And at age 72, I'm gonna be required to take a minimum distribution of a certain percentage because the IRS wants their tax dollars.
Diane: That's exactly right.
Paula: In the Roth, we talked about other things that we could use the money for prior to retirement. Can I do that with the traditional?
Diane: You can. So disability is one of those areas that if you have total and permanent disability, you can withdraw money from your traditional IRA. Again, that first time home buyer up to $10,000, if you inherit a traditional IRA, There's no penalty for that and Roth IRA conversions.
So if you convert money from your traditional IRA to the Roth, there's no penalty for that, but all of those will have taxable income. You can get a whole list, cuz there's a couple other pieces, directly from the IRS website.
Paula: I know we talked about Roths last week. So if anybody's interested in that Roth conversion conversation, they can go listen to last week's podcast on Roth IRA. Diane. I also heard that if you don't take your required minimum distribution when you're supposed to after age 72, that there's some sort of tax or penalty?
Diane: There is. So uncle Sam will smack your around pretty hard. If you do not take out your required minimum distribution. So that excise tax or penalty is 50%. Not only will you pay a 50% penalty on the amount that you were supposed to take. You get the double whammy of that whole portion is taxable to you. So it's pretty hefty. And you wanna make sure that you're taking out whatever required minimum distribution is required at age 72.
Paula: Whenever you're talking about requirement distributions, or what options are better for you, it's really great to reach out to a certified financial planner or even your tax person to talk about better options. Let's kind of sum up this whole thing about saving for retirement. We talked about Roth IRAs. We've mentioned traditional IRAs and 401ks. I think the thing is just to do it, correct? Just to do something?
Diane: Yes. Because basically you need to make it a habit as you put that money aside for retirement, rather you use a traditional IRA or a Roth IRA.
The bottom line is the slow and steady wins the race. And just getting into that weekly habit, monthly habit. For retirement down the road before you know it, you've gotta have something saved up.
Paula: I know it gets here quicker than you think. And by contributing on a weekly or monthly basis, whatever it is, you also get to take advantage of compounding.
So it is great to start something, even if you have to start small, to start saving for retirement whenever you can. So thanks, Diane. I really appreciate you being here. If somebody wants to talk to you, how can they get ahold of
Diane: you? I can be reached at DWinner@boaa.com. That's DWinner@boaa.com. Stands for Bank of Ann Arbor.com.
Paula: So I know Diane as a certified financial planner, you have a disclosure that needs to be said. So I'm gonna go ahead and read that right now. Securities and advisory services are offered through LPL Financial, a registered investment advisor and broker dealer. Member of FINRA SIPC. Thanks again, Diane, for joining us. If anybody would like to reach out to me, feel free to email me at Paula@PaulaChristine.com. Or check out my websit at PaulaChristine.com. Thanks again, Diane.
Diane: Thank you, Paula.