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When it comes to saving for your future, one place to start is figuring out which Individual Retirement Account (IRA) best fits your needs — a Roth IRA or a traditional IRA. While there are similarities between both, they differ in important ways — which IRA is right for you?

How They're Similar

For the 2018 tax year, both Roth and traditional IRAs allow you to invest up to $5,500 each year. Or, if you're 50 or above and nearing retirement, you may invest up to $6,500 each year. The good news is that the money you invest grows tax-free; however, the main difference is when your contributions and earnings are taxed.

How the Plans Differ

The key difference between a Roth and traditional IRA is when you pay taxes. Roth IRA contributions are made after-tax and as such earnings and withdrawals are generally tax-free. If you expect your income to go up and be in a higher tax bracket come retirement, this could be a good option.

If, however, you save for retirement using a traditional IRA, you could lower your tax liability now as your contributions could be tax-deductible. In other words, you may pay less in taxes now while investing for your future. However, you'll pay taxes on your withdrawals in retirement.

It's important to note though that the amount you deduct varies if you're also covered by an employer-sponsored plan through your job, as well as your tax filing status.

Traditional IRA

Roth IRA

Contribution Limits

$5,500 per year ($6,500 if 50 or above)

$5,500 per year ($6,500 if 50 or above)

Income Limits

None

Yes, depending on tax filing status

Taxes

Contributions are tax-deductible, pay tax on withdrawals during retirement

No tax deductions, pay taxes now, no tax on withdrawals during retirement

Withdrawal Considerations

Required minimum distribution by age 70½

No required minimum distribution

Benefits

No income cap, save money now

Can contribute past age 70½, have tax-free withdrawals

Eligibility

When it comes to eligibility, nearly anyone can save for retirement using a traditional IRA. So if you have taxable income and you're younger than 70½, you qualify. If you're 70½ or older, you're ineligible and can no longer contribute. At age 70½, people who save using a traditional IRA must start withdrawing money due to required minimum distribution rules. The traditional IRA has no income restrictions.

On the other hand, a Roth IRA has some income restrictions to consider. For example, your Modified Adjusted Gross Income (MAGI) must be less than $120,000 in order to contribute up to the limit. There are some nuances regarding how much you can contribute and at what point you are ineligible, depending on your tax filing status. The Roth IRA has no required minimum distribution, and you may still contribute past the age of 70½.

Roth IRA and Traditional IRA Withdrawals

As noted above, you must start withdrawing money from a traditional IRA at 70½, which you don't have to do with a Roth IRA. Using both of these plans, you can technically withdraw money at any time.

Your traditional IRA withdrawals are subject to taxation, while any qualified distributions from a Roth IRA will not be taxed. However, for both IRAs you could pay an extra 10% penalty if you withdraw early, prior to age 59½, unless you are eligible for an exception. Sometimes people will move funds from their retirement accounts because of financial hardships such as medical conditions.

Deciding which IRA is right for you can be tough, and there are implications to consider now and for your future. However, investing for your retirement is a crucial step to your financial stability. To help you determine which type of IRA makes the most sense for you, be sure to schedule an appointment with a Key Investment Services® Financial Advisor.

Disclosures

Investment products offered through Key Investment Services LLC (KIS), member FINRA/SIPC. KIS is affiliated with KeyBank National Association (KeyBank).

Investment products made available through KIS are:

NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE . NOT A DEPOSIT . NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

KIS and KeyBank are separate entities, and when you buy or sell securities you are doing business with KIS and not KeyBank.

KIS and its representatives do not provide tax advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions.

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