Traditional IRA Vs. A Roth IRA
Which IRA is better? A Traditional IRA or a Roth IRA?
A Traditional IRA is a tax deferred retirement plan. Contributions made to a Traditional IRA may be tax deductible depending on income, tax filing status, and some other factors. Contributions made to a Traditional IRA are made on a pre tax basis, which means the money is invested before it is taxed.
Investing pre tax money is that it has the potential to lower your current tax bracket, and your money will grow tax free until you withdraw it. Withdrawals that are qualified will be treated as ordinary income and may be subject to income tax.
Anyone can contribute to a Traditional IRA, but not everyone will get the benefit of a tax deduction. Traditional IRA holders are eligible to withdraw from their IRA at the age of 59 ½, at this point the withdrawals are taxed as ordinary income. You may incur penalties for early withdrawals.
A Roth IRA is a tax exempt retirement plan. Contributions made to Roth IRA’S are not tax deductible when they are made. Qualified distributions made during retirement years are tax free.
With Roth IRA’S a person that files their taxes as single can not earn more than $95,000. If you are married, you are limited to annual maximum income level of $150,000.
The minimum withdrawal age is 59 ½. When the money is withdrawn, none of the money is taxed. The principal can be withdrawn at any time without penalty. The earnings must remain in the Roth IRA or they will be subject to taxes and penalties if you make early withdrawals.
It is a good idea to investigate which type of IRA will be best for you, a Traditional IRA or a Roth IRA.