Saving for retirement is a very important responsibility that all people need to focus on. When saving for retirement, there are several tax-advantaged retirement accounts that can be used to help accumulate assets, save, and invest. Two of the most common retirement accounts today are the traditional and ROTH IRAs. When you are looking to start saving for retirement, there are several factors that should be considered when trying to determine if a Roth or Traditional IRA is right for you.
The first factor to consider is when you will pay taxes on your funds. With a Roth IRA, all of your contributions will be made post-tax and then will appreciate tax-free. When the time comes to withdraw funds, all money withdrawn will also be done so without taxes.
With a traditional IRA, your contributions can be tax deductible today. However, you will have to pay taxes on the money you withdraw in retirement. Generally speaking, if you believe that your tax rate will be lower in retirement than it is today, a traditional IRA is better. If you believe the opposite, then a Roth IRA would be a better option.
While IRAs are intended to be used for retirement, there may be a time when you need to access the money earlier. If you need to take money out before the age of 59.5, you will be subject to a 10% penalty with a traditional IRA. When you have a Roth IRA, you will not have to pay any penalty.
While most people will end up wanting to use their IRA funds at some point others may not want to have any requirements on when to take withdrawals. With a Roth IRA you will never have to take any distributions from the account until it is passed down to an heir. With a traditional IRA, you will be required to start making some minimum distributions after your 70th birthday. This could end up being very important and could require tax planning in the future.
Before making a decision on which account to choose, you also need to consider whether you are restricted based on your income. Today, people are able to contribute up to $5,500 per year if their income is below $118,000, or $186,000 if married and filing jointly. There is then a phase-out after your modified adjusted grow income hits $133,000, or $196,000 if filing jointly.
Those that are looking to contribute to an IRA will have the same $5,500 annual contribution limit, or $6,500 if they are over the age of 50. However, contributions are not limited by your income. However, you could be restricted if you have access to an employer-sponsored 401k or other retirement program.
In conclusion, saving for retirement is very important. Two of the best retirement accounts to consider today are the Roth IRA and traditional IRA. When looking to invest in one of these accounts, you should carefully consider the features and limitations of each type.