Future Planning: Roth vs. Traditional IRA
The latest reports show that 40 percent of Americans are afraid they won’t be able to retire on time because of financial management challenges.
Are you confused by the different future planning options out there? Are you unsure of where to begin when it comes to retirement planning?
If you said “yes” to either of these questions, keep reading. Outlined below are some of the key differences between ROTH IRAs and Traditional IRAs (some of the most popular retirement savings options) so you can make the right decision for your needs.
What Are IRAs?
IRA is an acronym that stands for Individual Retirement Account. IRAs are most frequently used by independent investors and those who are self-employed and don’t have access to an employer-provided 401(k) to help them save for retirement.
What Is a Traditional IRA?
A traditional IRA first came on the scene in 1974. This type of IRA allows you to direct your pre-tax income toward investments so your wealth can grow tax-deferred.
There are no capital gains or dividend income taxes to worry about until you make a withdrawal from your traditional IRA. You can also contribute 100 percent of your earned income toward your IRA, up to a specific dollar amount (in 2021, the limit is $6,000 or $7,000 if you’re over 50).
Traditional IRA Pros and Cons
When it comes to paying taxes, one of the main benefits of traditional IRAs is the fact that you don’t have to pay taxes on your contributions until you make a withdrawal. Anyone can contribute to a traditional IRA, too, so it’s also a good option for those who want to save extra money for retirement in addition to their 401(k).
The primary downside to a traditional IRA is that you will face penalties if you withdraw money early. This can get expensive, especially if you need to make a significant withdrawal.
What Is a Roth IRA?
The Roth IRA was first introduced in 1997 (it’s named after Senator William Roth, who sponsored the bill that introduced it).
Roth IRAs are funded using after-tax dollars. This means you cannot deduct your contributions when you follow your yearly taxes.
The contribution limits for Roth IRAs are also the same as those for traditional IRAs.
Roth IRA Pros and Cons
One of the greatest benefits of a Roth IRA is that you don’t have to pay taxes on the money you withdraw. The money you contributed has already been taxed, so you can spend it as you please without stressing over fees and penalties.
You can also set up a Roth IRA at any time and for anyone. You can even create a minor Roth IRA to help your child prepare for retirement early.
Start Future Planning Today
Now that you know more about your different future planning options, are you ready to start saving money for retirement? Keep the information discussed above in mind so you can streamline the financial planning process and feel more confident about the future.
If you want to learn more about retirement planning, head to the Business & Finances section of our site today. You’ll find lots of other helpful articles that will answer all your retirement questions.