The first benefit of choosing an IRA is the fact that you…yes you… can manage your own money. As we have said countless times, “At first, it is unnerving, and at the same time invigorating, when you are emancipated from the middle-man.” And although it will seem like you are treading water in the middle of the Atlantic, you will soon realize that your feet can touch bottom…and the bottom will actually be the foundation of your financial future!
Yes, you have to do some research and you have to pay attention if you want to manage your funds through an IRA, but your financial freedom will outweigh your, soon to be trivial, obligations. In this article, we will try to explain the basic difference between a Traditional IRA and a Roth IRA.
|Topic||Traditional IRA||Roth IRA||Winner!|
|Tax Deduction||Contributions will depend upon how much you make||You cannot claim your contributions||Traditional|
|Withdraws||You can begin when you turn 59 ½ but it is mandatory that you withdraw by the time you are 70 1/2||There is no obligatory age of allotment||ROTH|
|Funds||You can use your funds to buy an assortment of investment such as stocks, bonds, CODs, etc…)||You can use your funds to buy an assortment of investment such as stocks, bonds, CODs, etc…)||EVEN|
|Availability||Anyone can purchase this IRA no matter what their salary||If you are single, you can’t make more than $124,000 but a married couple can have a combined income of $196,000 (this is computed on an annual scale)||Traditional|
|Penalty||If you withdraw your funds before you are 59 ½ you will have to pay a penalty of at least 10% (this includes the money you originally contributed; otherwise known as your principal)||Your original contribution can be withdrawn at any point without any kind of penalty; however, but you will pay a penalty if you draw earnings||ROTH|
So, as you contemplate the basics of the IRAs, you will see that each one has its positives over the other, you will notice that I didn’t say that either one has “negatives” because neither one of these retirement plans has a trait that won’t blow your 403B account away!
So the major aspect that you want to consider before you choose between the Traditional IRA and the Roth IRA is the TAXES. If you choose a Traditional IRA you will be able to deduct your contributions from your actual annual salary. In other words, if you make $80,000 per year and you contribute $4,000 into a Traditional Ira you will actually pay taxes on $76,000. However, when you reach retirement age (59 ½) you will have to pay taxes on capital gains, interest, dividends, etc.
If you choose a Roth IRA, you would not be able to deduct anything from your salary, thus not lessoning your income. In other words, if you make $80,000 per year and you contribute $4,000 into a Roth IRA you will pay taxes on all $80,000. However, when you reach retirement age, you could retrieve all of your money tax free! Yes…TAX FREE!
So, when you are choosing between these two awesome staples of your retirement, the only gamble for you is this: If you think the interest rate will be higher in the future and you have enough in the present to skip out on a tax rebate, choose a Roth IRA, but if want your earnings now and think the interest rate will drop drastically in the future then choose a Traditional IRA.