Roth IRAs Vs Traditional IRAs
When it comes to Roth IRAs vs traditional IRAs there are many things that should be evaluated and compared. Each of these IRA types will help with retirement savings through the use of contributions, but they do so in different ways. A traditional IRA account takes pre tax contributions which means that any money placed in this account is deducted from earnings before taxes are assessed and paid. A Roth IRA account only accepts contributions from money that has already been taxed. This means that tax will be owed on any traditional IRA withdrawals taken after the required age has been reached. Roth IRA withdrawals are tax free as long as the age and account status requirements are met.
While there are approximately 11 types of IRA accounts available the traditional IRA and Roth IRA are two of the most popular types chosen. If the taxes owed at the time of retirement will be more than the taxes assessed against the income now then a Roth IRA may be a better choice. If the tax bracket involved after retirement is expected to be lower than it is now a traditional IRA may be the better choice between these two types of IRA accounts. A traditional IRA taxes withdrawals, so if a lower tax liability at retirement is expected it may be better to use this type of account. With a Roth IRA the taxes are assessed at the current tax bracket rate, and if this is lower than the expected tax bracket at retirement it makes sense to pay the taxes now.
A Roth IRA may be the perfect choice for an individual who has the expectation of increasing their earnings in the future. Before withdrawals can be made from a Roth IRA without any penalties assessed the account owner must meet the age requirement of 59 ½ and the IRA account must have been opened at least 5 years before the first withdrawal is made. A traditional IRA also has the same age requirement and also has a required minimum distribution requirement that is not present in a Roth IRA. With a standard IRA the account owner must start to take distributions from the account at age 70 years. A Roth IRA does not require mandatory distributions and the account can be passed down to the next generation.
Comparing Roth IRAs vs traditional IRAs will show that the maximum contributions and catch up contributions for both account types are the same. Both of these retirement accounts can be the perfect choice for some individuals but not for others. Before deciding on any type of IRA each individual will need to look at their retirement needs, annual earnings, filing status, and other critical factors. Some individuals may have more than one IRA type and account, and in some cases this can include both a Roth IRA and a traditional IRA. If this is the case then the allowable contributions for the year must be spread out across all the accounts. An individual with 3 IRA accounts can contribute the maximum amount to a single account, or put part of the money in more than one account. The total contributions to all these accounts combined can not exceed the allowable contributions for the year though, and this is true regardless of the IRA account types involved.
