Picking the Right Type of IRA for You
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Understanding the difference between a traditional and Roth IRA can go a long way in planning your retirement savings strategy.

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Being able to live the lifestyle you want in retirement often depends on saving consistently over many years. An individual retirement account (IRA) can be a powerful tool in this effort. Most IRAs offer tax benefits that encourage long-term retirement savings, along with a variety of investment options, including mutual funds and annuities.

The most common types of IRAs held by individual investors are traditional IRAs and Roth IRAs. Here’s what you need to know about each type of retirement account to determine which may be best for you.

Traditional IRAs

With a traditional IRA, you may be eligible for a tax deduction on some or all of the contributions you make each year, assuming you meet eligibility requirements. In practical terms, this means both income taxes on the money you use to fund your account and taxes on any gains in your portfolio invested in your IRA are delayed until they are withdrawn.

If you wait to withdraw funds until you turn age 59½, the IRS will tax your withdrawals as ordinary income. If you withdraw your money earlier, however, you may owe an additional 10% withdrawal tax. Additional taxes may be exempt for qualifying events. For example, withdrawals up to a certain amount for buying your first home or to cover death, disability or certain medical expenses.

Roth IRAs

Roth IRAs differ from traditional IRAs in one key way: The contributions you make to a Roth account are with money that has already been taxed.  The benefit to this setup comes later, during retirement, when you can withdraw your retirement savings tax-free.

There are a couple additional caveats with Roth IRAs. First, to qualify for tax-free withdrawals, you need to hold your investments in a Roth IRA for more than five years. Second, the IRS limits the amount you can contribute to a Roth IRA if your taxable earnings exceed its contribution limits in a given year; some taxpayers with high taxable income will not be able to contribute at all. Third, Roth IRAs impose the same 10% tax for withdrawals before age 59½ as do traditional IRAs. With a Roth IRA, however, you’ll also have to pay taxes on any investment earnings if you make an early withdrawal that’s not covered by one of the exemptions mentioned above.


Which is right for you?

The major difference between traditional and Roth IRAs involves when you pay taxes. Looking at your income today and comparing it to what you expect to receive in retirement could help you choose the right type of account.

For example, if you expect your income in retirement to be lower than it is now, you might consider a traditional IRA to shelter some of your current income from taxes. In this scenario, your withdrawals in retirement would likely be taxed at a lower rate, too.

Conversely, if you’re early in your career, a Roth IRA may help you stretch your future retirement savings. If years of compound growth result in significant investment gains, tax-free withdrawals could represent a substantial savings over a traditional IRA.

Since investments and taxes can be difficult to predict, you should consult a financial professional to discuss whether a Roth or traditional IRA would be a good fit for your particular financial needs.


Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company and do not protect the value of the variable investment options, which are subject to market risk.

The above is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. You should consult with their accounting or tax professionals for guidance regarding your specific financial situation.

Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply. Withdrawals will reduce the contract value and the value of the death benefits, and also may reduce the value of any optional benefits.

Under current law, a nonqualified annuity that is owned by an individual is generally entitled to tax deferral. IRAs and qualified plans—such as 401(k)s and 403(b)s—are already tax deferred. Therefore, a deferred annuity should be used only to fund an IRA or qualified plan to benefit from the annuity’s features other than tax deferral. These features include lifetime income, death benefit options, and the ability to transfer among investment options without sales or withdrawal charges.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company.

Pacific Life’s Home Office is located in Newport Beach, CA.


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