Traditional IRA vs Roth IRA…Which Is Right For You?
When it comes to your personal finances one of the most important topics is financing your retirement. There are two main ways people save for retirement, they have an employeer 401K plan or with an Individual Retirement Account (IRA). I am going to focus on IRA’s.
When setting up an IRA there are two different types that you can choose from. The first one is a traditional IRA and the other is a Roth IRA. There are several differences between the two, however, here are the factors that most FreeSnatcher readers will need to know.
Whether you end up with a Traditional IRA or a Roth IRA there is a $5,000 annual contribution limit for the tax year 2010. If you are 50 year old to start the year or turn 50 during 2010 you can also contribute $1,000 in catch-up money.
There are no income limits on how much you can earn when investing in a traditional IRA. For tax year 2010 if you are a single tax filer there is an income limit of $105,000 in order to be able to invest in a Roth IRA. If you are married filing jointly there is a $160,000 income limit.
Both Traditional and Roth IRA’s have different tax advantages. If you invest in a Traditional IRA you are able to use pre-tax dollars. This means that you will be taxed upon withdrawal at retirement. Any money that you place in a Roth IRA has already been taxed so that money and any profits will not be taxed upon withdrawal.
If you have a traditional IRA you are required to start taking yearly distributions once you reach age 70.5. There are no distribution requirements with roth IRA’s.
You are required to pay an early withdrawal fee if you take distribution from a traditional IRA before age 59.5. If you invest in a Roth IRA than you are not penalized if you meet the following two factors.
- You are taking distribution no sooner than five years from your first contribution payment.
- You are taking the distribution because of one of these reasons:
* You have reached age 59.5
* Your beneficiary receives the distribution upon your death
* You are disabled
* You purchase your first home (lifetime maximum of $10,000)
When I talk to people about the benefits of different IRA’s I like to tell them to think of it in one way. If you are currently in a lower tax bracket than you plan to be at retirement than you are best suited for a Roth IRA. If you are currently in a higher tax bracket than you plan on being in at retirement then I recommend a traditional IRA.
If you have yet to start an IRA for yourself or your family it is never too late or too early. You can do so at any bank, mutual fund of brokerage firm. If you need help getting started I would be more than willing to point you in the right direction.