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Traditional vs. Roth IRA
Traditional Individual Retirement Accounts (IRAs), which were created in 1974, are owned by roughly 41 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 32 million households. (1)
Both are IRAs. And yet, each is quite different.
Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions to their account(s). Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions. (2,3)
For individuals covered by a retirement plan at work, the deduction for a traditional IRA in 2025 is phased out for incomes between $126,000 and $146,000 for married couples filing jointly and between $79,000 and $89,000 for single filers. (4)
Also, within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2025, contributions to a Roth IRA are phased out between $236,000 and $246,000 for married couples filing jointly and between $150,000 and $165,000 for single filers. (4)
In addition to contribution and distribution rules, there are limits on how much can be contributed each year to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $7,000 per year into their Roth and traditional IRAs combined. So, if a worker contributed $4,000 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $3,000 in that same year. (4)
Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $8,000. (4)
Both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: open an account.
(5)
* Up to certain limits
** Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.
*** To qualify, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
1. ICI.org, February 2024
2. IRS.gov, 2025. In most circumstances, once you reach age 73, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). You may continue to contribute to a Traditional IRA past age 70½ as long as you meet the earned-income requirement.
3. Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into their account(s). Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.
4. IRS.gov, 2025
5. The Tax Cuts and Jobs Act of 2017 eliminated the ability to "undo" a Roth conversion.
February 7, 2025
Did you know that an estimated $13.5 trillion in assets are indexed or benchmarked to the Standard & Poor’s 500 Composite Index, including $5.4 trillion in index assets? (1,2) The S&P 500 is ubiquitous – we see it on the news, read about it in the newspapers, and, very likely, see some of our own investments’ performance compared against it. For an index that represents approximately 80% of the value of the U.S. equity market, it may be worthwhile to gain a better understanding of how it works. (1) Cap & Criteria The index, as we know it today, was introduced in 1957 and is maintained by the Standard & Poor’s Index Committee. Contrary to popular belief, it is not comprised of the 500 largest companies in America, but is a collection of large-cap stocks representing a broad range of market sectors, including technology, energy, health care, and consumer staples, among others. (3) There are a number of criteria a company must meet to be considered for inclusion in the index. Some of these criteria include the following: it must be a U.S. company, have an unadjusted market capitalization of $15.8 billion or more, have 50% of its stock available to the public, and have four consecutive quarters of positive earnings. (4) Changes Over Time Another common misconception is that the index is a static one. In fact, companies will be removed, from time to time, for reasons that include violation of one or more of the criteria used for adding companies or because of a merger, acquisition, or significant restructuring, including bankruptcy. The turnover in the index’s constituent companies was 3.2% in 2021 (per the most recent data available). According to one projection, the average tenure of companies in the index is expected to fall to 15-20 years this decade, as compared to the 30-35 year average tenure in the late 1970s. (5) Add and Subtract When changes are made to the index, many mutual funds and exchange-traded funds that seek to replicate the index may have to sell stocks that are being removed and buy the stocks that are being added in order to track the index. Keep in mind that amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost. (6) Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. Investors cannot invest in an index. Also, index performance is not indicative of the past performance of a particular investment, and past performance does not guarantee future results. Investment choices designed to replicate any index may not perfectly track it, and their returns will be reduced by fees and expenses. 1. US.Spindices.com, May 31, 2022 (most recent data available) 2. The S&P 500 Composite index (total return) is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. 3. Investopedia.com, June 21, 2023 4. SPGlobal.com, February 2024 5. Innosigh.com, 2021 (most recent data available) 6. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
February 7, 2025
Capital gains result when an individual sells an investment for an amount greater than their purchase price. Capital gains are categorized as short-term gains or long-term gains.
February 7, 2025
One study estimates the average cost of raising a child to the age of 17 for a middle-income family is about $310,605. As a point of comparison, the median home price in the U.S. was $417,700 at the end of 2023. (1,2) If you want to add the cost of education to that number, you can expect to be paying an additional $24,030 a year for the cost of a public four-year in-state university. (3) But before you throw your hands up in the air and send junior out looking for a job, you might consider a few strategies to help you prepare for the cost of higher education. First, take advantage of time. The time value of money is the concept that the money in your pocket today is worth more than the same amount will be worth tomorrow because it has more earning potential. If you put $100 a month toward your child’s college education, after 17 years’ time, you would have saved $20,400. But that same $100 a month would be worth over $32,000 if it had generated a hypothetical 5-percent annual rate of return. The bottom line is: the earlier you start, the more time you give your money the potential to grow. (4) Second, don’t panic . Every parent knows the feeling – one minute, you’re holding a little miracle in your arms, the next, you’re trying to figure out how to pay for braces, piano lessons, and summer camp. You may feel like saving for college is a pipe dream. But remember, many people get some sort of help in the form of financial aid and scholarships. Although it’s difficult to forecast how much help your student may get in aid and scholarships, these tools can provide a valuable supplement to what you have already saved. Finally, weigh your choices. There are a number of federally and state-sponsored, tax-advantaged college savings programs available. Some offer prepaid tuition plans, and others offer tax-deferred savings. Many such plans are state-sponsored, so the details will vary from one state to the next. A number of private colleges and universities now also offer prepaid tuition plans for their institutions. It pays to do your homework to find the vehicle that may work best for you. (5) As a parent, you teach your children to dream big and believe in their ability to overcome any obstacle. By investing wisely, you can help tackle the financial obstacles of funding their higher education – and smooth the way for them to pursue their dreams. 1. Investopedia.com, December 14, 2023 2. StLouisFed.org, 2024 3. CollegeBoard.com, 2023 4. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for higher returns also carry a higher degree of risk. Actual results will fluctuate. Past performance does not guarantee future results. 5. The tax implications of education savings programs can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.
February 7, 2025
Asset allocation applies this same concept to managing investment risk. Under this approach, investors divide their money among different asset classes, such as stocks, bonds, and cash alternatives
February 7, 2025
It doesn’t take a degree in finance to see that the cost of college continues to rise. How can you best estimate the cost of schooling?
February 6, 2025
The growth of exchange-traded funds (ETFs) has been explosive. In 2006, there were less than 1,000; by 2024, there over nearly 10,000 investing in a wide range of stocks, bonds, and other securities and instruments. (1) At first glance, ETFs have a lot in common with mutual funds. Both offer shares in a pool of investments designed to pursue a specific investment goal. And both manage costs and may offer some degree of diversification, depending on their investment objective. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline. Structural Differences Mutual funds accumulate a pool of money that is then invested to pursue the objectives stated in the fund's prospectus. The resulting collection of stocks, bonds, and other securities is professionally managed by an investment company. ETFs work in reverse. An investment company creates a new company, into which it moves a block of shares to pursue a specific investment objective. For example, an investment company may move a block of shares to track the performance of the Standard & Poor's 500. The investment company then sells shares in this new company. (2) ETFs trade like stocks and are listed on stock exchanges and sold by broker-dealers. Mutual funds, on the other hand, are not listed on stock exchanges and can be bought and sold through a variety of other channels — including financial professionals, brokerage firms, and directly from fund companies. The price of an ETF is determined continuously throughout the day. It fluctuates based on investor interest in the security and may trade at a "premium" or a "discount" to the underlying assets that comprise the ETF. Most mutual funds are priced at the end of the trading day. So, no matter when you buy a share during the trading day, its price will be determined when most U.S. stock exchanges typically close. Tax Differences There are tax differences, as well. Since most mutual funds are allowed to trade securities, the fund may incur a capital gain or loss and generate dividend or interest income for its shareholders. With an ETF, you may only owe taxes on any capital gains when you sell the security. (An ETF also may distribute a capital gain if the makeup of the underlying assets is adjusted). (3) Determining whether an ETF or a mutual fund is appropriate for your portfolio may require an in-depth knowledge of how both investments operate. In fact, you may benefit from including both investment tools in your portfolio. Amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost. Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. At a Glance Mutual funds and exchange-traded funds have similarities — and many differences. The chart below gives a quick rundown.
February 6, 2025
Ancient Chinese merchants were said to have developed a unique way to manage their risk. They would divide their shipments among several different vessels. That way, if one ship were to sink or be attacked by pirates, the rest stood a good chance of getting through. Thus, the majority of the shipment could be saved. Your investment portfolio may benefit from that same logic. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss. The key to diversification is to identify investments that may perform differently under various market conditions. On one level, a diversified portfolio should be diversified between asset classes, such as stocks, bonds, and cash alternatives. On another level, a diversified portfolio also should be diversified within asset classes, such as a diverse basket of stocks. A Diversified Approach For example, let’s say a stock portfolio included a computer company, a software developer, and an internet service provider. Although the portfolio has spread its risk among three companies, it may not be considered well diversified, as all the firms are connected to the technology industry. A portfolio that includes a computer company, a drug manufacturer, and an oil service firm, however, may be considered more diversified. Similarly, a bond portfolio that invests exclusively in long-term U.S. Treasuries may have limited diversification. A bond fund that invests in short-term and long-term U.S. Treasuries, plus a variety of corporate bonds, may offer more diversification. Mutual Funds and ETFs The concept of diversification is one reason why mutual funds and Exchange Traded Funds (ETFs) are so popular among investors. Mutual funds accumulate a pool of money that is invested to pursue the objectives stated in the fund’s prospectus. The fund may have a narrow objective, such as the auto sector, or it may have a broader objective, such as large-cap stocks. ETFs also can have a narrow or broader investment objective. Keep in mind, though, the more narrow an investment objective, the more limited the diversification. Furthermore, a narrow investment objective may result in more volatility and additional risks associated with a particular industry or sector. The concept of diversification is critical to understand when you are evaluating a portfolio. If you want more information on diversification or have questions about how your money is invested, please call us to review your situation. Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from Crown Financial. Read it carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.
February 6, 2025
In the final days of 2022, Congress passed the SECURE Act 2.0, a new set of rules designed to help investors who wanted to contribute to retirement plans. Many of these changes were intended to give investors more flexibility and new ways to enhance their retirement strategies. It was a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which was also an important piece of legislation aimed at helping investors save more effectively. Both the SECURE Act and SECURE Act 2.0 have dozens of provisions, including new rules that may impact retirement. Here are a few things you might want to know about how the SECURE Act 2.0 changed required minimum distribution (RMD) rules and how qualified charitable distributions (QCDs) may fit into how you choose to take these distributions. Remember, this article is for informational purposes only and is not a replacement for real-life advice. We encourage you to consult your tax, legal, and accounting professionals before modifying your retirement income strategy. The SECURE Act 2.0 and Required Minimum Distributions RMDs are the amount of money that investors must withdraw each year from certain retirement accounts. These withdrawals are taxed as ordinary income. You can begin taking penalty-free withdrawals at 59½ or earlier in some cases if you have experienced a qualifying life event. In the past, retirement distributions were required beginning at age 70½. Under SECURE Act legislation, investors can wait until age 72 or age 73 if they turn 72 after December 31st, 2022.1 Forgetting to take these required distributions can come with penalties! The penalty was previously a 50% excise tax. Still, the SECURE Act 2.0 reduced that penalty to 25%, or 10%, if the minimum distribution oversight is corrected within two years and the proper paperwork is filed. In some cases, that penalty may be waived altogether if the account owner made a “reasonable error” and took documented steps to correct the oversight. (1) The Qualified Charitable Distributions (QCD) Approach to Required Minimum Distributions QCDs can offer an opportunity to support your favorite causes and manage your retirement income. They allow those who are obligated to take RMDs to donate those funds directly from specific retirement accounts to qualified charities without recognizing the distribution as taxable income. Here’s how it works: Individual retirement account (IRA) withdrawals are generally taxable, but QCDs are excluded from taxable income, meaning they do not increase your adjusted gross income. For some, this may be a strategy to consider when balancing supporting a charitable organization with managing taxes. You must be at least 70½ years old to qualify for a QCD. The distribution can be made from an IRA. You can also donate from a SEP IRA or SIMPLE IRA as long as they are inactive, meaning that you’ve made no contributions to the account in the year the QCD is distributed. However, remember that 401(k)s and other non-IRA retirement vehicles do not qualify for QCDs. To qualify for the tax- and penalty-free withdrawal of earnings, Roth IRA QCD distributions must meet a 5-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. The maximum annual limit for QCDs is currently set at $100,000 for 2024, an amount that adjusts annually for inflation. Therefore, staying updated on the annual cap is important, as it can influence your donation strategy. It’s prudent to confirm the status of your chosen charity through the IRS Online Search Tool or by consulting a professional who can speak to the tax status of the organization. If you withdraw and then donate the funds, it does not count as a QCD and becomes taxable. As with many financial strategies, your state may have specific rules impacting how QCDs are treated. It’s vital to check with a tax professional about state-specific regulations. Crown Financial can help you take your RMDs or set up QCDs. In addition, if you have any questions or concerns about how the changes enacted by the SECURE Act or SECURE Act 2.0 might affect your retirement strategy, please don’t hesitate to reach out. We’re here to help you make the most of these updates and navigate your retirement strategy. 1. IRS.gov
February 6, 2025
Unsure about what the SECURE Act 2.0 means for you? Here's a quick breakdown of the key changes and how they might impact your retirement planning.
February 6, 2025
In the final days of 2022, Congress passed a new set of retirement rules designed to facilitate contribution to retirement plans and access to those funds earmarked for retirement. The law is called SECURE 2.0, and it is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019. The sweeping legislation has dozens of significant provisions; here are the major provisions of the new law. New Distribution Rules Required minimum distribution (RMD) age will rise to 73 years in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking RMDs. Further, starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. However, if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach. (1) Access to funds . Plan participants can use retirement funds in an emergency without penalty or fees. For example, 2024 onward, an employee can take up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse. (2) Reduced penalty . Starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25 percent from 50 percent. If you promptly fix the mistake, the penalty may drop to 10 percent. (3) New Accumulation Rules Catch-up contributions. From January 1, 2025, investors aged 60 through 63 years can make annual catch-up contributions of up to $10,000 to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals with annual earnings more than $145,000.4 Automatic enrollment . In 2025, the Act requires employers to automatically enroll employees into workplace plans. However, employees can choose to opt-out. (5) Student loan matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans. (6) Revised Roth Rules 529 to a Roth. Starting in 2024, pending certain conditions, individuals can roll a 529 education savings plan into a Roth individual retirement account (IRA). Therefore, if your child receives a scholarship, goes to a less expensive school, or does not go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are also allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. (7) SIMPLE and SEP. 2023 onward, employers can make Roth contributions to savings incentive match plans for employees (SIMPLE) or simplified employee pension (SEP). (8) Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth IRA rules. From 2024, the legislation no longer requires minimum distributions from Roth accounts in employer retirement plans. (9) More Highlights Support for small businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100 percent from 50 percent for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan. (10) Qualified charitable donations (QCDs). 2023 onward, QCDs will adjust for inflation. The limit applies on an individual basis; therefore, for a married couple, each person who is 70½ years and older can make a QCD as long as it remains under the limit. (11) The change in retirement rules does not mean adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changes to another. Moreover, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It is not intended as a substitute for real-life advice. If changes are appropriate, your trusted financial professional can outline an approach and work with your tax and legal professionals, if applicable. 1. Fidelity.com, December 23, 2022 2. CNBC.com, December 22, 2022 3. Fidelity.com, December 22, 2022 4. Fidelity.com, December 22, 2022 5. Paychex.com, December 30, 2022 6. PlanSponsor.com, December 27, 2022 7. CNBC.com, December 23, 2022 8. Forbes.com, January 5, 2023 9. Forbes.com, January 5, 2023 10. Paychex.com, December 30, 2022 11. FidelityCharitable.org, December 29, 2022
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