Traditional IRA v. Roth IRA
How is it already the end of February? This year is flying by. As of this writing, Tax Day is 47 days away. If you haven’t filed yet, here’s why you should. If you have filed and are expecting a refund, you should read this post before you go on a shopping spree. Owe taxes? No worries, we have a Tax Loan special that was made for you!
I know it can be tempting to spend your tax refund, but you might want to consider investing that windfall in yourself, instead. Retirement may be here before you know it. One great way to do that is by depositing your money into an IRA. Did you know there are many different types of IRAs? For the sake of time, this post will focus on the two most common types you hear about, Traditional IRAs and Roth IRAs. What’s the difference between the two? I’m glad you asked.
Traditional IRA
This IRA is a good option for individuals who think that their tax bracket may be lower than their current bracket by the time they retire. It’s also a great option if your current employer doesn’t offer a retirement plan, but you still want to save for retirement. You will be able to take advantage of an upfront tax break plus a lower taxable income for the year.
This plan is not taxed until funds are withdrawn, which means that when you are ready to retire, the money in the account is going to be taxed at your current tax rate. Why is this important? Because if you are unexpectedly in a higher tax bracket, you’ll be paying more money to Uncle Sam when you are entering the world of fixed-income. While everyone enjoys a good surprise, this probably isn’t the most opportune time for that kind of surprise.
Roth IRA
The Roth IRA is the opposite of a Traditional IRA when it comes time to pay taxes on your money. Instead of paying taxes when you hit retirement age, you’ll be paying taxes upfront. If you are lucky enough to be in a higher tax bracket when you leave the work-force, you’ll enjoy the benefit of having paid a lower tax rate while you were in the lower bracket instead of paying taxes based on your higher tax bracket when you need to use your money.
Another perk to a Roth IRA is that if you need to access your money before retirement, you can take advantage of tax and penalty-free withdrawals on your contributions (you’ll still have to pay penalties and taxes if you withdraw your earnings before retirement.
Bottom Line
Here’s the great news. You are not stuck with just one of these accounts. You can have BOTH types and take advantage of the benefits of each! Most financial institutions offer comprehensive savings products that include IRAs. You can check ours out right here. IRAs and investments can be confusing at times, so I do recommend you speak to your tax professional and/or your financial advisor. They can help answer specific questions tailored to you and your needs.
As always, I want to hear from you! Leave me a comment below or send me an email!
Krista Kyte is a personal finance blogger and personal banker with over 17 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.
