We Want a Diverse Area With Moderate Population, Warm, Beach and Culture—So Where Should We Retire?

Dear MarketWatch,

We are African-Americans and want to retire to a diverse area with moderate population, warm, beach, culture. We can afford a better-than-average lifestyle and want to feel accepted in our new community — hopefully somewhere with high walkability and homes with character. And maybe near a major airport…. for lots of traveling.

Let me know what you come up with. Thanks.

— Jennifer

Dear Jennifer,

We all know there are plenty of beach towns in the U.S., but finding one with personality is a bigger challenge.

I’m going to leave out some obvious places, like Miami Beach and, though less diverse, Hilton Head. On the West Coast, no Southern California. Too obvious. Plus, while you can afford a better-than average lifestyle, home prices there are so high that they could hamper your travel budget. The same goes for Sag Harbor and the Hamptons more broadly (plus you’d still have winter on Long Island).

Instead, I’ll look for some off-the-beaten path possibilities. I’m sure readers will have their own suggestions.

As always, explore the area in all seasons, and be realistic about the retirement budget. When you find your dream place, ask which areas are susceptible to flooding during hurricanes and other storms.

A street in the historic district of Wilmington, NC
A street in the historic district of Wilmington, NC

Courtesy Wilmington and Beaches Convention & Visitors Bureau

The Atlantic: Wilmington, North Carolina

Check out the Cape Fear region, which includes Wilmington as well as beach towns like Carolina Beach and the more upscale Wrightsville Beach.

Wilmington is growing quickly and at 123,000 people has more than half of New Hanover County’s population. The share of those 65 and older are roughly in line with the U.S. average. Look for a place where you’ll catch a breeze off the Intracoastal Waterway or the ocean to counter the summer humidity — so not too far inland.

You’ll have no shortage of cultural offerings, starting with Thalian Hall, the Cameron Art Museum and the Wilson Center. The University of North Carolina Wilmington, which has 17,000 students, lets those 65 and older audit classes for free, while its Osher Lifelong Learning Institute offers shorter courses to those 50 and older.

Be sure to explore the Gullah Geechee Cultural Heritage Corridor, which stretches from Wilmington to Jacksonville, Fla., and is home to cultural groups descended from enslaved peoples from West and Central Africa. Poplar Grove Plantation is one local site.

Winter days get into the 50s, with average lows in the 40s. Average highs in July are in the 80s.

Here’s what’s on the housing market now in Wilmington and in New Hanover County using Realtor.com (which, like MarketWatch, is owned by News Corp.).

As for travel, while Wilmington has an airport, you’ll have more choices flying from Raleigh two hours away.


Gulfport, FL, is next to St. Petersburg.
Gulfport, FL, is next to St. Petersburg.

Courtesy Visit St. Pete/Clearwater

The Gulf of Mexico: Gulfport, Florida

Florida’s popularity with retirees is no secret, in part because it’s affordable and has no state income tax. But all too often, home means living in a high rise or a gated community.

Gulfport, though, is described as how Key West was before it became overrun with tourists.

This town of 12,000, just west of St. Petersburg, is your artsy, funky, walkable spot in the middle of the Tampa Bay metro area and its 3 million people. You’ll also find plenty of retirees; 30% of Gulfport’s residents are 65 or older.

Gulfport comes with sunset views from its own (man-made) strip of sand over Boca Ciega Bay so, yes, it’s on the Gulf side of Florida but technically not on the Gulf of Mexico. But opposite the bay is St. Pete Beach, which gets raves from TripAdvisor (a local says head to the Pass-A-Grille section at the southern tip). When you tire of that, there are more white-sand beaches to sink your toes in, including Siesta Beach in Sarasota an hour south (and Dr. Beach’s pick in 2017 for best beach in the U.S.) as well as Caladesi Island State Park (No. 6 on Dr. Beach’s list this year) an hour north.

And if you just want to walk, don’t overlook the 45-mile Pinellas Trail that stretches from St. Petersburg to Tarpon Springs and goes through the northern edge of Gulfport.

For bigger getaways, there’s Tampa International Airport.

To get a sense of the local housing market, here’s what’s for sale now, again using Realtor.com.

As you explore the Tampa area, also check out Safety Harbor, a town of 18,000 on the western side of Tampa Bay with its own walkable downtown, and Dunedin (pronounced Duh-nee-din) north of Clearwater that’s also popular with retirees. You know there’s plenty of cultural offerings in a metro this size. One that might be easy to overlook: the Dr. Carter G. Woodson African-American Museum in St. Petersburg.


Overlooking Waikiki Beach
Overlooking Waikiki Beach

Christopher Ball/iStock

The Pacific: Oahu, Hawaii

If year-round pleasant weather is the priority, Hawaii can’t be beat. Average highs are in the 80s year-round, and average lows bottom out in the mid-60s. Of course there’s no shortage of beautiful beaches.

When you tire of water, take advantage of wonderful hiking opportunities. And while the focus of your international travels might shift toward Asia, you may want to spend more time just staying, discovering Hawaiian culture and exploring some of the national parks.

You admittedly won’t find a big population of African-Americans here, but Hawaiians have a much more open and fluid view of race and diversity than many of us on the mainland.

Start your search for your retirement life on Oahu Island. About a third of the island’s million residents live in Honolulu itself, one of the country’s most diverse and affluent cities and the birthplace of President Barack Obama. Curious about sites associated with him in some way? Here are even more.

You’ll find plenty of cultural offerings in Honolulu (including some of Hawaii’s best festivals, as voted by readers of Hawai’i Magazine), plus the state university (those 60 and older can audit classes for free).

There’s even Costco, if that’s your thing. Oh, and that Elvis statue…

Yes, there’s the cost of getting everything to Hawaii — some things will be even more expensive than parts of California. Here’s what the local housing market looks like.

If Honolulu is too pricey, consider some of the smaller towns on the island. Or check out the less-populated (and cheaper) Big Island, also known as Hawaii Island. Start with the Kalaoa area.

Source: realtor.com

My Husband Bought a Retirement Property, but Only Put His Name on the Deed. Will His Adult Children Inherit This Home?

Dear Moneyist,

My husband and I have been married for 25 years. We do not have children together, but he has children from a previous marriage.

We are retired now, and he bought property in Florida for us to live in. My name is not on the deed of the property, and he has not made a will yet. I keep complaining to him about it.

If he should die without a will, will his adult children and grandchildren be entitled to the property and house? Hopefully, you will be able to answer this question and set my mind at ease.


Dear Carla,

Your husband appears to have control issues at worst or, at best, problems with being direct and transparent. This is not the way to deal with a family property, especially after 25 years of marriage. If your husband wants his children to inherit his estate when he is gone, he should discuss it with you like a man (or woman), face to face, and you should outline a plan for your future together. But this game of cat and mouse, where he makes unilateral decisions about your future, is not a respectful or helpful way to conduct a 25-year marriage.

Not knowing if you’re going to have a place to live after your husband dies, assuming he predeceases you, creates a constant feeling of unease. The whole point of saving for retirement and being fortunate enough to retire comfortably is that you can see out your final years together with the knowledge that you will both be financially secure. Only one person in this relationship knows what that feels like — and, given that you have raised this issue with him, he is aware that you do not enjoy that same peace of mind.

Florida is an equitable distribution state and, for the most part, divides property 50/50. Here’s the legal interpretation from Schnauss Naugle Law in Jacksonville, Fla.: “If the decedent’s homestead property was titled in the decedent’s name alone, and if the decedent was survived by a spouse and descendants, the surviving spouse will have the use of the homestead property for his or her lifetime only (or a life estate), with the decedent’s descendants to receive the decedents’ homestead property only after the surviving spouse dies.”

You will have the right to live in this property for the remainder of your life. If you divorce, however, anything purchased during your marriage is considered marital property, and even though this home was purchased in your husband’s name only, it would be divided 50/50. In Florida, “equitable distribution” is mostly treated as “equal distribution.” According to this interpretation of family law in Florida by Arwani Law: “Even if he purchases the car with his own money and puts the car title in his wife’s name, it is still considered marital property.”

And as most lawyers will tell you, a lack of communication is one way of buying a ticket to divorce.

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

One Trick That’ll Help You Live a Wealthier and Happier Life: Framing

The happiness we feel about our money, work, relationships and life in general isn’t derived by only what happens, but also how we perceive what happens.

A famous saying often attributed (rightly or wrongly) to Roman emperor and Stoic philosopher Marcus Aurelius goes like this: “Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”

What he seems to be articulating is a cognitive bias named more than 1,500 years later as the “framing effect.”

The framing effect is the psychological principle that our decisions are influenced by how choices are positively or negatively presented. It is related to the groundbreaking research of Amos Tversky and Daniel Kahneman known as prospect theory, which states the pain of a loss is twice as powerful as the pleasure of a gain. What that means is that when given the choice, people prefer a sure gain over a probable one, and they prefer a probable loss over a definite loss.

When presented with a positive frame, people tend to avoid risks. But when presented with a negative frame, people tend to seek risks. As a simplification of one role-playing experiment involving a life-or-death scenario shows, people will avoid letting 10 out of 100 lives perish but will take the opportunity to save 90 out of 100 lives, even though each option results in the same outcome.

A Key Route to Positive Thinking: Framing

You can see the concept of framing at work at your local grocery store. For example, beef advertised as “95% lean,” versus “5% fat.” Or, more misleading, food products that don’t naturally contain gluten labeled as “gluten-free” just to make them appear healthy. Gluten-free candy, anyone?

Framing is considered one of the strongest cognitive biases that impact the decision-making process. It can influence everything from our political and social attitudes – what we call spin – to how we spend money and even what type of health insurance we choose.

While all of this may sound alarming, there is a major silver lining. We are not relegated to being only involuntary victims to framing. Instead, we also have the ability to use it as a tool to make better decisions and become happier people.

How Framing Can Help Investors’ Outlook

One of the most enlightening investment charts out there is from J.P. Morgan Asset Management’s Guide to the Markets showing the S&P 500’s annual low points and ending year returns since 1980. It certainly comes in handy during wild stock market swings.

A graph shows the S&P's intra-year lows vs. calendar year returns.A graph shows the S&P's intra-year lows vs. calendar year returns.

The average intra-year market decline has been 14.3% over the past 41 years. Yet annual returns have been positive in all but 10 years, or more than 75% of the time. Of course, the past is no guarantee of the future. But it goes to show there are two ways of looking at a market drop: as something to worry about, or as a typical short-lived decline in another typical year that will likely end in the black.

By framing things in the right way, you can make smarter choices with your money that lead to better outcomes. It can help you avoid rash decisions, such as impulse buying and making emotional investment changes.

It can make you more content with what you have (what I have now is what I once wanted) and more dedicated to saving (to spend this money is to live a life I may not want, but to save is to eventually live the life I do want).

To Be Happy, Have the Right Frame of Mind

There are a variety of ways to frame situations that are conducive to your financial goals. For example, if your friend is getting married in Aruba, and it’s not in your budget to go, instead of thinking to yourself, “We’re missing our friend’s destination wedding,” tell yourself, “We’re choosing to stay committed to our financial goals.” Or say there’s a hot shoe sale going on. Tell yourself, “Yes, that’s a great sale , but it’s still spending money I don’t need to spend.”

But there is much more. Framing can also help you find greater peace of mind and happiness – every day. Research indicates that people become happier with age, greatly because they start to perceive the world in a more positive and impartial light. Journalist John Leland came to that conclusion while spending a year interviewing six New York City residents who were 85 and older. He documented his experience in the book Happiness Is a Choice You Make.

“Older people are more content, less anxious or fearful, less afraid of death, more likely to see the good side of things and accept the bad, than young adults,” Leland writes. A day spent at the doctor’s office for a bad hip was still the gift of another day of being alive. A new complicated device meant spending quality time with the grandkids as they teach you how to use it. For older adults “problems were only problems if you thought about them that way. Otherwise they were life — and yours for the living.”

Give It a Try Yourself

We all have ability to frame situations differently, in a way that leads to better decisions and better outcomes. It can alter our perceptions, changing the way we see ourselves and the way we see others. What do you think if you see someone’s unmade bed? They’re lazy? Sloppy?

Now, what if we frame it in a more compassionate way. Perhaps, it is the habit of someone who is too consumed with work outside the home to be able to give much time to this one detail.

Give it a try. Plan a day to actively reframe things around you. And, whenever something bad happens, pause and ask yourself how you can turn it into a positive. You can work your mind like a muscle until you find yourself more receptive to how things are and less upset over how you wish they were. It’s when you do that, when what you want most – a happy, fulfilling life – happens.

Here are some examples framing things differently:

  • Your company’s 401(k) match: It’s limited to a measly 6%, OR it’s a guaranteed 100% return on your contribution.
  • A beat-up used car parked next to a Ferrari: Thousands of dollars in income parked next to thousands of dollars in debt
  • A pair of $300 shoes: 10 hours of work at $30 per hour in wages
  • A kid’s temper tantrum: He’s an out-of-control brat, OR he’s a child who is frustrated at not yet having the words to express himself.
  • Someone who is always late: She’s irresponsible and thoughtless, OR she’s someone who respects many people’s time and is too optimistic about how many meetings she can squeeze in.
  • Difficult feedback at work: I’m being picked on, OR I’m getting information to help me improve —and surpass the people giving me difficult feedback.
  • Market downturn: It’s time to sell everything, OR some good stocks are available at a discount.

You don’t always get to decide what happens in life, but you do always get to decide how you will react, which ultimately determines how events shape you. This brings to mind the oft-cited 2005 Kenyon College commencement speech by writer David Foster Wallace about the value of education in making concerted choices to see the world truthfully and not in a mindless, unfulfilling default mode.

He starts with a story: “There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says, ‘Morning, boys. How’s the water?’ And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes ‘What the hell is water?’”

Many of us go through life asking the same question, he says. We make choices based on our set perceptions without trying to see for what they truly are. Wallace continues: “The only thing that’s capital-T True is that you get to decide how you’re gonna try to see it.”

But reframing doesn’t come naturally. So, he ends with a proclamation that it is a continuous process, that it will take an “…awareness of what is so real and essential, so hidden in plain sight all around us, all the time, that we have to keep reminding ourselves over and over: ‘This is water.’”

Manager of Investor Education, Advance Capital Management

Jacob Schroeder is the Manager of Investor Education at Advance Capital Management (www.acadviser.com/). His goal is to help people make more informed financial decisions and live happier lives. He is also the creator of the personal finance blog Incognito Money Scribe (incognitomoneyscribe.com/), exploring the mystery and meaning of money.

Source: kiplinger.com

How to Retire in Sweden: Costs, Visas and More

How to Retire in Sweden: Costs, Visas and More – SmartAsset

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Sweden is one of the most sought-after countries in the world. It offers an excellent quality of life for retirees with beautiful landscapes and historic, walkable cities to enjoy. The archipelagoes on both the nation’s East Coast and West Coast, famous smoked herring and classic meatballs plus vast, unspoiled forests offer something for just about any retiree. If you want to retire in this Scandinavian nation of just over 10 million people, this article will cover everything you need to know, from what costs you can anticipate to the quality of the healthcare system and more.

Cost of Living and Housing in Sweden

Sweden is an expensive country. Not counting rent, Sweden’s consumer prices are about 8.5% higher than those in the U.S., according to Numbeo, one of the largest cost-of-living databases. That higher cost of living, however, does not come from more costly housing expenses. Rather it comes from more expensive groceries and transportation, including more expensive gasoline.

Your housing dollars can go farther in retirement in Sweden than in the U.S. For example, rent costs are, on average, 32% lower than in the U.S. If you rent an apartment in New York City, a one-bedroom unit in the city center will likely cost about $3,415 per month. The same apartment in Stockholm would cost about $1,507 per month.

If you want to purchase an apartment in central NYC, it will likely cost about $1,319 per square foot. If you purchase in central Stockholm, it will likely cost just over $1,000 per square foot.

Retire in Sweden – Visas

Americans do not need a tourist visa to visit Sweden. However, if you plan to retire in Sweden, you’ll need a Schengen visa, which you must apply for before you move to Sweden. You can apply by visiting a Swedish consulate or embassy in the U.S. You’ll need to bring a valid passport, financial disclosures and a passport photo. You will also go through a residence permit interview in Washington, D.C.

The processing time for a Swedish residence visa varies, so you may want to wait until your residence permit is approved before purchasing a one-way ticket.

Retire in Sweden – Healthcare

Sweden has some of the healthiest seniors in the world. This is partially due to a culture that encourages people – no matter their age – to enjoy the outdoors during every season. People are encouraged to walk and bike whenever possible, as well as ski and skate in winter.

Another reason for the health of Swedes and Swedish residents is the country’s top-flight healthcare system, which also provides preventative healthcare. All Swedish residents have access to public healthcare. All residents must also pay taxes on their income, and taxpayers fund their public healthcare system. Nearly 10% of the country’s GDP is invested in healthcare, so Sweden has some of the best public healthcare in the world. Its Karolinska Institute, and attached hospital, is world renowned. The institute selects the winner of the Nobel Prize in physiology or medicine.

Health insurance is rare in Sweden due to the public healthcare system being strong and available to all residents. Expats who want to use the public healthcare system must apply for a personal identification number at their local tax office. Then they will be issued a healthcare card.

Retire in Sweden – Taxes

Taxes in Sweden are notoriously high, though the burden of these taxes falls primarily on consumption rather than corporate earnings. That has fostered the rise of global giants like Ikea, Volvo, Electrolux and Ericsson.

What expats pay in taxes varies depending on a person’s stay in the country. For example, anyone staying six months per year or longer will pay the highest taxes, and anyone who is a resident but chooses to stay for less than six months may pay less. There is an opportunity for expatriate tax relief that reduces salary tax.

However, if you are not working during your Swedish retirement then these laws may not apply to you. Sweden taxes foreign-earned income if you are considered a resident. This includes your American pension and capital gains. If you want to avoid paying taxes in the U.S. and being taxed again in Sweden, it is a good idea to work with a tax professional and a financial advisor. They can help you navigate the complicated tax codes such as the U.S.-Sweden Tax Treaty, which helps determine how both countries will treat income.

Retire in Sweden – Safety

In general, Sweden is a very safe country. There are minimal personal crimes and very few personal safety concerns in this country. In fact, according to the U.S. Department of State’s Overseas Security Advisory Council, general crime rates in Sweden are below the U.S. national average. However, the organization also cautions that just because the crime rates are low, it doesn’t mean the foreign travelers are immune to crime. The majority of crime involves the theft of personal property from vehicles, homes and public areas.

But, if you find yourself in an unsafe situation, emergency medical care is available throughout the country and is both affordable and high quality. There are several rural areas in Sweden where one might find themselves far from the nearest clinic or hospital and therefore should take extra precautions when traveling.

The Takeaway

Sweden is known for its healthy and active seniors as well as its beautiful landscapes and coastal areas. It is generally very safe, has excellent healthcare and is affordable for those living on a fixed income. If you are considering a move to this northern European country, be sure to discuss your plan with a financial advisor. They will be able to help you create a financial plan that includes an international move.

Tips on Retiring

  • Retiring abroad can seem like a difficult task. Still, the right financial advisor can help you understand what you need to do to take your retirement income abroad and navigate the tax implications. SmartAsset’s free tool will match you with financial advisors in your area in a matter of minutes. If you’re ready to start planning your move to Sweden, get started now.
  • As mentioned above, Sweden and the U.S. have tax codes that can help make your retirement more affordable. You may be able to live there on your Social Security retirement benefit. You can estimate your benefit amount with a Social Security calculator.

Photo credit: ©iStock.com/scanrail, ©iStock.com/Sjo, ©iStock.com/Martin Wahlborg

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.

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Traditional IRA vs. Roth IRA: How to Make the Right Choice for Your Retirement Goals

Whether you’ve just started your first job or are well into your career, you’re likely to be focused on one key priority: building the best possible retirement savings plan for a comfortable future. No matter where you are in your journey, there are multiple options available to you and many factors to consider.

An individual retirement account, or IRA, for example, can serve as a turbo-booster for your retirement plan. As you save for retirement, it’s important to make sure you’re using the tax benefits of IRAs to your full advantage.

With two types of IRAs to choose from, you have a decision to make: Should you choose a Traditional IRA or Roth IRA?

Greg McBride, a chartered financial analyst and the chief financial analyst at Bankrate, and Brian Martucci, finance editor at financial education website Money Crashers, answer some of the most common questions around choosing a Traditional IRA vs. Roth IRA so you can make an informed decision.

Why contribute to an IRA?

Before we dive into the differences between Traditional and Roth IRAs, let’s review why IRAs are such an effective tool to save for retirement in the first place.

IRAs provide tax-advantaged ways to save for retirement. In other words, you may pay less in taxes when you use an IRA versus a personal brokerage account, which means you can enjoy a bigger nest egg in your golden years.

If you’re self-employed or don’t have access to an employer-sponsored account such as a 401(k), then an IRA can be your go-to account for building up your retirement savings while reducing your taxes. Even if you have a retirement account through your employer, you can supplement that savings with an IRA, a strategy many experts recommend.

Examine the difference between a Traditional IRA and a Roth IRA to determine which one is better suited to your retirement goals.

That’s because IRAs often offer a much broader field of savings and investment options than many workplace plans, Martucci notes. Possibilities within an IRA—whether you have a Traditional IRA or Roth IRA—include IRA savings accounts, IRA certificates of deposit, money market accounts and investments (e.g., stocks and bonds).

Plus, with longer retirements becoming common, a larger pot of savings can bring peace of mind. “If you can afford to make contributions and don’t need the money for day-to-day spending or shorter-term financial goals, why not do so?” Martucci says.

Am I allowed to contribute to an IRA?

As long as you earn income, you can contribute to an IRA to save for retirement. You’re also eligible if you filed taxes jointly with a spouse who has income from employment.

Anyone earning income can contribute to a Traditional IRA. Martucci notes that if you or your spouse are covered by a retirement plan at work, then you can only deduct your contributions from your taxable income if your modified adjusted gross income is within ranges specified by the IRS.

Before deciding whether a Traditional IRA or Roth IRA is right for you, make sure you're eligible to contribute to them.

To even contribute to a Roth IRA, you must meet certain income requirements. In 2020, for example, you had to earn less than $139,000 (if filing singly) or $206,000 (if filing jointly with your spouse) in order to contribute to a Roth IRA.

It used to be that Traditional IRA contributions were not allowed after age 70½, but the passage of the SECURE Act of 2019 changed that.

As of tax year 2020, there are no age limits for contributing to Traditional IRAs or Roth IRAs. You can start contributing—and keep contributing—throughout your life.

For the 2020 tax year, contribution limits stand at $6,000 per year before age 50 and $7,000 per year after age 50, but be sure to check the latest contribution limits defined by the IRS.

What’s the difference between Traditional IRAs and Roth IRAs?

When it comes to Traditional IRAs vs. Roth IRAs, they both have tax advantages. It’s the way their tax breaks work—as well as a few other nuances—that separates them.

Traditional IRAs: Deduct from taxes now, but pay later

If you qualify to deduct your contributions to a Traditional IRA from your taxes, then you’ll be happy to see a reduction in your tax bill. But Martucci explains that when you withdraw those funds from your Traditional IRA in retirement, those distributions are taxed as ordinary income.

One difference between a Traditional IRA and a Roth IRA is that with a Traditional, you can take a full deduction up to the amount of your contribution limit every tax year before you retire. You can take these deductions if your modified adjusted gross income is $65,000 or less (if filing singly) or $104,000 or less (if married and filing jointly).

Roth IRAs: Pay taxes now, but not in retirement

With Roth IRAs, it works the other way around. You contribute after-tax funds to a Roth IRA. When you withdraw from your Roth IRA account in retirement, however, you can do so tax-free.

Basically, McBride says, you will pay taxes one way or the other. With Traditional IRAs, you pay later. With Roth IRAs, you pay now.

Required minimum distribution (RMD) rules

Tax rules are an important difference between Traditional IRAs and Roth IRAs, but they also have different rules for when you are required to withdraw funds.

Martucci notes that Traditional IRA holders must begin withdrawing funds the year they turn 72.** Roth IRA holders, on the other hand, aren’t bound by RMD rules—an advantage if you don’t need the funds at that point.

Early withdrawal penalties

Because IRAs are designed specifically to help Americans save for retirement, there are withdrawal penalties designed to prevent people from pulling money out early from either a Traditional IRA or a Roth IRA.

If you withdraw money from a Traditional IRA before you’re 59½, you may get hit with an additional early withdrawal tax of 10% on the amount you withdrew—and that’s on top of any taxes you’ll need to pay.

With Roth IRAs, the early withdrawal rules are a little different. Because you already paid taxes on your contributions, you can pull them out of your Roth IRA penalty-free at any age. But if you withdraw any earnings on your contributions before 59½, you’re on the hook for the 10% early withdrawal tax plus income taxes. This is the case unless the distribution is considered a “qualified distribution” by the IRS.

Traditional IRA vs. Roth IRA: Which should you choose?

Before you stress out about making the wrong choice when comparing Traditional vs. Roth IRAs, McBride and Martucci want you to keep in mind that they are both wise choices. Either way, you’re taking advantage of tax breaks to save for retirement, and that’s a smart financial decision you should be proud of.

When debating a Traditional IRA vs. Roth IRA, your expected tax bracket in retirement should help guide the decision.

When deciding whether you should choose a Traditional IRA or Roth IRA, the general rule of thumb is to contribute to a Roth if you think you’ll be in a higher tax bracket in retirement than you are in now. If you think you’ll be in a lower tax bracket in retirement, conventional wisdom says you should contribute to a Traditional IRA.

However, McBride and Martucci agree that it can be difficult to predict what your future tax rate will be. That’s because tax rates often change, so you can’t assume they will be the same when you retire as they are today.

Because Traditional IRAs are bound by RMD rules, there is the possibility that those required withdrawals, which are considered income, could bump you into a higher tax bracket while in retirement.

“One of the advantages of a Roth is it helps people avoid having this big tax bomb in retirement because there are no required minimum distributions for Roth IRAs, and earnings from a Roth aren’t taxed anyway,” McBride says.

The bottom line? Don’t spend too much time worrying about how your future taxes will be affected by your IRA choice today. As long as you’re investing in an IRA—Traditional IRA or Roth IRA—you’re on the right track. Just try to avoid the common retirement mistake of putting off saving for too long.

Consider both a Traditional IRA and a Roth IRA

Still can’t decide between a Traditional IRA or a Roth IRA? Good news: You can use both types of IRAs.

“It certainly makes sense to have multiple IRAs for tax optimization and diversification purposes,” Martucci says. He notes that your annual contribution limit applies to the total of both IRAs combined.

If you use both, he recommends holding higher-growth-potential investments (such as individual stocks or exchange-traded equity funds) in your Roth IRA. On the other hand, he recommends holding lower-risk, potentially lower-return vehicles (such as municipal bonds or IRA savings accounts) in your Traditional IRA to avoid excessive taxes on withdrawals.

Now that you have a solid understanding of the differences between Traditional and Roth IRAs, you can confidently put your IRA accounts to work toward your retirement goals.

Your retirement might feel like it’s a long way off, but the sooner you can start the journey, the better. Explore the ways that Discover IRA Accounts can help you get there.

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.

* The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. Please consult your tax advisor with respect to information contained in this article and how it relates to you.

** Distributions are required to start by age 70½ if you were 70½ by 12/31/2019. If you turn 70½ in 2020 or years following, distributions will not be required until you are age 72.

Source: discover.com

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