Latest news with #income taxes
Yahoo
5 hours ago
- Business
- Yahoo
Should You Choose a Traditional IRA Over a Roth for Retirement Savings?
Key Points You never escape income taxes, but IRAs can help you control when you pay them, possibly lowering your lifetime tax payments. Roth IRAs are exempt from required minimum distributions, a boon if it's your intent to leave some of your retirement account for an heir. Many investors choose to have both a workplace 401(k) account as well as a self-directed IRA held with a retail brokerage firm. The $23,760 Social Security bonus most retirees completely overlook › It's a question investors have been asking themselves since they were first given the choice back in 1998: Do I take my tax break now and pay taxes later, or do I pay my taxes now and enjoy tax-free IRA distributions later? A traditional IRA offers the former. A Roth IRA allows for the latter. That is to say, unlike traditional IRAs (sometimes called contributory IRAs), contributions to Roth retirement accounts aren't tax deductible. Also unlike traditional IRAs, though, distributions from Roth accounts aren't taxable. There's still no clear answer to the question. Or it might be more accurate to say that the answer changes from one investor to the next, since everyone's situation is unique. There is one common criterion every investor should consider, however, before choosing one or the other. An option for every scenario If you aren't familiar with the difference between a contributory IRA and a Roth IRA, here's a brief primer. Individual retirement accounts have been around since 1974, created by that year's Employee Retirement Income Security Act. That's when it was becoming clear that corporate pensions alone -- the source of most peoples' retirement incomes up to that point -- simply weren't up to the task any longer on their own. Workers embraced their new self-directed retirement savings vehicles too, using contributions to these accounts to lower their taxable income. Withdrawals from these ordinary IRAs, however, are treated as taxable income by the IRS. Congress took the idea a step further in 1978, introducing workplace 401(k) accounts to take more of the ever-growing pressure off of employers' still-struggling pension plans by allowing workers to tuck away much more of their income for retirement. Like the IRAs introduced just four years earlier, 401(k) accounts allow for pre-tax contributions. The IRS just collects what its due on the back end, when money is taken out of these accounts. Then in the late 1980s Delaware Senator William Roth and some of his colleagues introduced a different idea. Rather than allowing for tax-deductible contributions to IRAs now and taxing this money and its growth later, why not forego the tax break linked to contributions to retirement accounts and instead allow tax-free distributions from these IRA accounts as they are withdrawn in retirement? That idea became law in the Taxpayer Relief Act of 1997, leading to the creation of Roth IRAs in 1998. Three years later, Congress allowed these same taxability rules to apply to 401(k) accounts with much bigger contribution limits. It's (almost) all about minimizing taxes Assuming you're able to contribute to either and that you qualify to contribute to a Roth, which one makes the most sense for you? The answer is, you should aim to pay your retirement savings-related taxes when your taxable income is going to be at its lowest. For most people this will mean funding an ordinary or traditional IRA during your working years, and then paying income tax on IRA distributions in retirement when your income is likely to be lower. Exceptions are certainly possible, though. For example, if for some reason a traditional IRA has grown to an extraordinary sum and is going to generate more annual income than you ever earned in as an employee, a Roth is likely the right answer. On a net basis, you'll keep more of your income. There are some other important matters to consider. Chief among them is what you're going to do with any tax savings you'll achieve by making tax-deductible contributions to ordinary IRAs or 401(k) accounts while in your working years. If it's your intent to spend most or all of this savings rather than invest at least most of it for retirement outside of a qualified retirement account, you might be better served by funding a Roth account instead -- you may need all the retirement income you can get when the time comes. You should also know that while Roth accounts can be a bit inflexible in terms of withdrawals when you first open them, they become more flexible in time. Specifically, with some rare exceptions, not only do you need be at least 59 1/2 to make a penalty-free and tax-free withdrawal, but the Roth account must have been opened and funded for at least five years. Early withdrawals -- before you turn 59 1/2 -- from traditional IRAs and 401(k) accounts are also usually subject to taxes and penalties, but at least there's no five-year minimum rule. Then there's another important consideration: Do you actually need or even want the retirement income either type of IRA will provide? Most people do. But on the off-chance you don't, know that you're not required to take any distributions from a Roth account. That's not the case with a traditional or contributory IRA or 401(k). Once you reach 73 years of age, the IRS imposes required minimum distributions from ordinary retirement accounts, forcing you to make taxable withdrawals from them. So if it's your plan to leave all of your retirement savings to an inheritor or even multiple inheritors, this can matter. Leaving everything in a Roth account at least leaves all of your assets in one account that's relatively easy to retitle, with fairly flexible rules for your heirs to gain access following the account owner's passing. Just don't fall victim to analysis paralysis Still not sure? Here's the thing -- you don't necessarily need to choose only one or the other. If you've got the option of a Roth 401(k) at your place of work, you can also add to a contributory IRA outside of your employer's plan. Or vice versa. Remember that just because you fund one kind of account or the other in any given year doesn't mean you're limited to funding that kind of account forevermore -- you can own more than one kind of IRA. You're even allowed to fund ordinary and Roth IRAs in the same year. Just make sure you don't contribute more to a Roth than your income allows. Also be sure your total combined contribution to all of your retirement accounts doesn't exceed the sum-total limit the IRS imposes for any given tax year. And yes, the agency knows. Your broker reports these contributions. Most importantly, do something. The biggest mistake isn't choosing the wrong kind of IRA. Rather, it's worrying so much about it that you end up doing nothing. Both accounts are perfectly fine options when the alternative is funding neither. The $23,760 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these Motley Fool has a disclosure policy. Should You Choose a Traditional IRA Over a Roth for Retirement Savings? was originally published by The Motley Fool Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
CTV News
22-07-2025
- Business
- CTV News
Average Canadian family spent 42.3 per cent of income on taxes in 2024: study
A family making breakfast is seen in this stock photo. (Pexels) The average Canadian family spent 42.3 per cent on income taxes in 2024, according to a new study published by the Fraser Institute. The tax bill, which includes visible and hidden taxes, totals more than the 35.5 per cent for housing, food and clothing combined. 'At a time when the cost of living is top of mind across the country, taxes remain the largest household expense for Canadian families,' said Jake Fuss, director of fiscal studies at the Fraser Institute. 'While Canadians can decide for themselves whether or not they get good value for their tax dollars, they should understand how much they pay in taxes each year.' The average Canadian family, which the Fraser Institute says has an income of $114,289, paid $48,306 in total taxes to the federal, provincial, and local governments – including income taxes, payroll taxes and sales taxes. 'Taxes have grown much more rapidly than any other single expenditure for the average family,' according to a news release from the Fraser Institute. The study points out that the average Canadian Family only spent 33.5 per cent of their income on taxes in 1961, with 56.5 per cent going to basic necessities. The Fraser Institute says the average Canadian family's total tax bill has 'increased nominally' by 2,784 per cent since 1961. Comparatively, housing increased by 2,129 per cent, food by 927 per cent and clothing by 460 per cent.
