Roth and Traditional IRAs: Which One is Right for You?
Establish that nest egg you've always wanted – starting now! Many people put off saving for retirement, which can seriously set them back on retirement planning. And these days, it's not enough to depend on Social Security or pensions. So take saving into your own hands with an Individual Retirement Account (IRA).
An IRA is an amazing retirement savings tool. The money you invest can give you tax savings as opposed to other money you may be saving outside of retirement accounts. You can contribute up to $5,500 to an IRA a year, and you can contribute through payroll deduction, lump sum deposit or a rollover from another IRA. So which type of IRA is right for you?
Traditional IRA. This IRA allows you to make contributions to your account with pretax dollars. You can use this IRA to lower your taxable income, and thus lower the amount you have to pay in taxes. You don't pay taxes on this account until you begin to make withdrawals at age 59½. When you do begin making withdrawals, you will be charged at your current tax rate. Be aware that any early withdrawals are penalized.
Roth IRA. Roth IRA contributions are made with after-tax dollars. This means it does not lower your taxable income. The advantage is that your earnings grow tax-free, and your withdrawals are made tax-free. Plus, you won't have to pay taxes on this money when you retire. You will be penalized for early withdrawals, so it's best to wait until you're 59½ to start pulling the money.
Both IRAs have great advantages, and your decision needs to be made with careful consideration. Your money will likely be taxed at a lower rate with a traditional IRA, with the assumption that you will be making less money once you've retired. However, with a Roth IRA, you will pay taxes on a smaller amount of money since you will only pay money on your contributions and not on your earnings.
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