You should invest in your future by preparing well for your retirement. One of the best ways of preparing for your retirement is to invest in an IRA i.e. an Individual Retirement Account. The Roth IRA and the Traditional IRA are the most convenient and suitable kinds of IRAs you can choose as an investment.
Please remember (common confusion)…A Roth IRA and a Traditional IRA are not products or investments in themselves. Picture a “jacket” going around your money, which hold different investment strategies with the letters IRA on the jacket. As long as the money is in the “jackets” then it affords the relative tax rule. These two kinds of IRAs have similar contribution limits but are otherwise very different IRA’s. We have therefore prepared a basic account of the differences. By the end of this article, you will be equipped with enough information to choose between either one of the two.
The Traditional IRA
The Traditional IRA is a retirement instrument based on tax deferment. The funds put into it are at first invested before being subject to taxation. The contributions made to this IRA are also tax deductible but this depends upon the income and tax filing status of the taxpayer making these contributions. Anyone can contribute to this kind of IRA. Withdrawals from it can only begin at 59.5 years of age. It is at this point that taxation now applies. There will be a tax on each withdrawal as if it were ordinary income. What does this mean? It acts (for tax purposes) as if it came in your paycheck. The required minimum distributions for this IRA begin at 70.5 years of age (technically speaking, the April following the year you turn 70.5). Holders of traditional IRAs are required to withdraw some minimum amount each year where or not they are in need of the cash withdrawals. How much you ask? Well, that’s based on the IRS’ life expectancy table.
The Roth IRA
It is a retirement instrument based on tax exemption. The contributions made to this IRA are not tax deductible. However, the withdrawals that you will make in your retirement days are tax-free. The minimum withdrawal age for this IRA is also at 59.5 years old. You can withdraw the principal amount at any time without the threat or incurring a penalty. However, you cannot withdraw the earnings from this principal until you have surpassed the age limit. This IRA has no minimum distribution levels.
Which IRA Is Better?
Both IRAs have their own unique advantages and disadvantages depending upon your circumstances. For instance, traditional IRAs will allow you to lower your tax bracket while you are working and still withdraw your funds at a low tax bracket in future. They are however, a nuisance if you will not need your withdrawals in future but still have to make them since they are mandatory. Roth IRAs on the other hand mean tax-free withdrawals on both the principal amount and the earnings on that principal. There are also no mandatory minimum distribution requirements. However, the major disadvantage of these IRAs is that they are not open to everyone due to their prohibitive income limits. Have more questions or are you ready to make a decision? Contact financial consultant David Kujawa to further discuss the best options to suit your financial needs.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. If you need referrals to local accountants, please contact me.
David Kujawa has over 8 years’ experience as a financial consultant based in Kane County, IL. His mission is to deliver Respected Strategies through Ambitious Problem Solving, Focused on you and your unique family situation utilizing his key Financial Fitness process.