Difference Between Roth and Traditional IRA

vehicle to retirementAnyone who has earned taxable income is allowed by the IRS to contribute up to $5,000 every year to an . The two main types of are traditional IRAs and IRAs. Are interested in finding out the difference between Roth and traditional IRA? Need to know which type of IRA is right for you? Answer these four basic questions to find out if a traditional or Roth IRA would be more beneficial for you.

How much money do you make?

A Roth IRA comes with the benefit of future tax-free income after you are retired. Your Roth IRA earnings will never be taxed. Even your investments are made in assets that increase in value you still won’t owen a penny in from profits you make from selling those assets. You won’t even be taxed from interest or dividends from those investments. The only downfall is that you cannot put money into a Roth IRA if you gross income is greater than $116,000 per year if you are single. If you are married that level only increases to $169,000. So high earners are less likely to be able to take advantage of the benefits from a Roth IRA.

Would you like to reduce the amount of taxable income for the year?

All contributions made to a traditional IRA can be deducted from your yearly taxable income. It is common practice to make contributions to traditional IRAs at the last minute in order to stay in a lower income tax bracket. This is a perfectly legal way to reduce the amount of tax that you need to pay for the year. This not something that would work with a Roth IRA.

Is it possible that you may need to withdraw funds from your IRA before the age of 59 1/2?

Any money that you withdraw from a traditional IRA before age 59 1/2 will incur an early withdrawal penalty of 10%. However, you can withdraw contributions from a Roth IRA at any time and only earnings from the IRA are subject to the penalty. It goes without saying that you should avoid withdrawing money from any retirement funds before retirement, but if you think it is a possibility, go with a Roth IRA.

Will you be in a lower tax bracket after retirement?

Regardless of when you withdraw money from a traditional IRA, you will pay income tax on the total amount of withdrawal. However, if you are in a higher tax bracket now than you will be at retirement, which most people will, you won’t pay as high of a tax on contributions later on. This makes a traditional IRA attractive to those who will make considerably less money once they retire.

The list of banks, credit unions, and financial institutions who offer IRA accounts is immense. Many of these companies offer fully managed plans that will invest your money into a portfolio, while others offer plans that allow you to manage the investments yourself. Whatever company or plan you choose, one thing is for certain, investing in an IRA is a very important step in planning for a happy, healthy retirement.

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