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What Kind of IRA is Best for You? Thumbnail

What Kind of IRA is Best for You?

What Kind of IRA is Best for You

We’re setting up a series of IRA, or individual retirement accounts, posts to help you make informed decisions. First, you need to understand the difference between the common kinds, the traditional IRA and the Roth IRA.

People like IRAs because they can be invested in just about everything except life insurance or collectibles, so it is possible to make a positive return on your money. Investors with experience in real estate can even use their money to buy real estate through a self-directed IRA.

Unlike employer-sponsored retirement plans, with an IRA (Individual Retirement Account), the plan is in no way tied to your employment. You can even withdraw money penalty-free before age 59 ½ if it is for a qualified first-time home purchase or education expenses.

For many people, investing in an IRA is an easy decision. Where they struggle is in deciding which kind to invest in, a traditional IRA or a Roth IRA.


 A traditional IRA is a tax-deferred retirement account, meaning that is funded with pre-tax money and the taxed are paid when money is taken out in retirement. This is great for some people because they find themselves in lower tax brackets after retirement, so they ultimately could owe less in tax payments.

With Roth IRAs, you pay all taxes up front, when the investment is made. But you don’t pay taxes on the growth, since you already paid taxes at the initial investment point. You also aren’t required to make required minimum distributions, which traditional IRAs demand. And you aren’t required to make withdrawals at the age of 70 ½. There are income limitations on who is allowed to use a Roth IRA. In 2019, singles making over $137,00 cannot contribute to a Roth and the amount they can contribute begins phasing out after $122,000 of earnings. In 2019, married couples filing jointly making more than $203,000 cannot contribute to a Roth and the amount they can contribute begins phasing out after $193,000 of earnings.[1]

So which type of IRA is best for you? Typically, a Roth IRA is best for a younger people because they have more time to take advantage of compounding interest. The closer you are retirement, the more you should consider traditional especially if you will need the money sooner. 

If you are rolling over an old 401(k) to open an IRA, your decision regarding the type of account to open will have considerable tax implications. You won’t have to pay any taxes to roll a traditional 401(k) into a traditional IRA, but to roll it into a Roth you will have to pay taxes on the entire account. 

This is where a certified financial planner can help you consider all aspects of your finances, your planning and your long-term and short-term cash needs to determine which type is best for your financial goals.

Create The Life You Love®

If you have not taken the steps to Create The Life You Love®, or if you would like to review your plan, Jonathan P. Bednar, II, CFP® may be reached at 865-251-0808 or mailto:Jonathan@ParadigmWP.com     www.ParadigmWealthPartners.com

Traditional IRA withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

Roth IRA withdrawals prior to age 59 ½ or or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of ROTH IRAs. Their tax treatment may change.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

About Paradigm Wealth Partners

Paradigm Wealth Partners is an independent investment advisory firm that offers comprehensive financial planning. We serve individuals, families, and businesses near Knoxville, Tennessee and around the country. Professional financial planning services include investment planning, retirement planning, insurance, and estate planning. We invite you to schedule a free consultation to get a second opinion on your financial plan. To learn more about our team, visit our website, read our blog, or contact our office at 865-251-0808.

[1] “Amount of Roth IRA Contributions That You Can Make For 2019.” Internal Revenue Service, www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019.