A Roth IRA is a type of Individual Retirement Account that helps a person save for their retirement.
A Traditional IRA is another type of Individual Retirement Account that helps a person save for their retirement.
Advantages of a Roth IRA
A Roth IRA has many advantages. For example, any direct contributions that a person makes to their Roth IRA can be withdrawn tax free whenever the person needs or wants to withdraw the money. And after the seasoning period (or five years) any rollover contributions can be withdrawn penalty and tax free. When a person with a Roth IRA is 59 ½ they can begin to withdraw their earnings penalty and tax free.
A person is able to contribute to their Roth IRA even if they also have another retirement plan like a 401(k). And if the owner of a Roth IRA passes away, their spouse will become the beneficiary of that Roth IRA even if they have their own Roth IRA as well. A Roth IRA does not require a person to take out money when they reach a certain age either.
Advantages of a Traditional IRA
With a Traditional IRA a person is able to make contributions to their retirement account before the money is taxed. And depending on a few qualifications, a person’s contributions to their Traditional IRA may be tax deductible.
A Traditional IRA does not have income limits specifying who can contribute to a Traditional IRA. Many people find comfort in knowing that they received their tax benefits right away when they use a Traditional IRA instead of having to wait for the benefits if they used a Roth IRA. It is always possible that the rules may change when it comes to taxes throughout the years.
Disadvantages of a Roth IRA
Of course there are also disadvantages to a Roth IRA as well. For one, the contributions that a person makes to their Roth IRA are not tax deductible. There is also a limit to the income amount a person can make in order for them to be able to even have and to contribute to a Roth IRA.
If a person who is in a high or even a moderate tax bracket contributes to a Roth IRA they will probably end up paying more income taxes on the earnings they make from the Roth IRA compared to the income taxes that they would have to pay later if they used a Traditional IRA instead. This is because many people tend to be in a lower tax bracket when they are retired.
It is very important for a person to pay attention to their current income and their current tax bracket and to think about where they may be (as far as taxes go) when they plan to retire. This can help them make a better decision about where they should invest their money for retirement.
Disadvantages of a Traditional IRA
As with the Roth IRA, the Traditional IRA also has disadvantages along with its advantages.For example, there are certain requirements that must be met for a person’s contributions to their Traditional Ira to be tax deductible. And of course the withdrawals from a person’s Traditional IRA are taxed the same as the rest of their income.
When a person is 70 ½ they have to begin to take money out of their Traditional IRA. And if a person is under the age of 59 ½ they may have to pay a penalty if they withdraw money at that age.