With all the information on iras many people are still confused which is best for them. Iras are ideal tax-advantaged investment products for saving for retirement. They come in two forms, roth and traditional. However, some key differences exist between them.
With a traditional ira you must start withdrawals at age 59 ½ but with a roth ira withdrawals are not required at any time. In fact, you can hold a roth ira your entire life without making a withdrawal. A nice benefit if you want to leave money to your heirs.
Traditional iras allow an investor to put money in without paying income taxes on them. This allows the money to grow tax-deferred until 59 ½ when withdrawals from the ira are taxed. In order to withdraw money prior to age 59 ½, you will pay taxes and a penalty on the money withdrawn. With a roth ira money is taxed at the investor's current tax rate when contributed to the ira. The funds then continue to grow tax-free. One of the advantages is that early withdrawals of the original contributions can be taken tax and penalty-free. Earnings (interest) can not be withdrawn free of charge. In order to withdraw any earnings, the earnings must have been invested in the ira for 5 years and you must be 59 ½ years old. Otherwise, you will be charged a penalty and taxes on the earnings.
So which is better – a roth or traditional ira? A roth ira makes the most sense. Not only does it grow tax-free thereby allowing you to never pay another cent in taxes, but, if you choose, you can leave the ira alone and never have to withdraw from it. Tax-free earnings gives you much more money when you do retire and less hassle at tax-time. Beyond that your original contributions can be withdrawn at any time if you need the money. Although an ira is best left to grow for your retirement, if you need money in an emergency it is nice to know it is available. Not so with a traditional ira. This is an added comfort if you are uncertain of your job health.
One problem with a roth ira is that eligibility to contribute is based on your income, whereas with a traditional ira, there is no limit placed on the amount of income you can make in order to contribute. Obviously, to contribute to either a roth or traditional ira, you must have been working and receiving earned income; that income has to be at least as much as your ira contribution. Income and contribution limits change yearly so check with the IRS for the current rules.
Overall, if your income qualifies, a roth ira is an excellent retirement savings option. It grows tax-free and you can wait to take withdrawals until you are ready to use the money. Plus, if you need money you can get it back without penalty so it can act like a savings account but hopefully with better returns. Just try to return the money so your retirement is not unduly impacted.
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