What is the Difference Between an IRA and a Roth IRA
It is never too early to begin to think about retirement. Actually, financially speaking, the earlier you begin to invest in your future and that of your family’s, the better. While it may seem like a distant reality now, it will sneak up on you and your loved ones quickly if you are not prepared. By that time, it will be too little too late.
A great way to plan for the future is to look into setting up either an IRA or a Roth IRA. Both are relatively painless to set up. A quick visit to your favorite banking institution or brokerage office is all that it takes. Comparatively speaking, opening fees are much less than those of other investment plans, making IRAs and Roth IRAs an even more appealing way to plan for retirement. Once the decision is made to invest in an IRA, there is only one question left to answer. Traditional or Roth? The pros and cons of both must be weighed carefully before proceeding.
A traditional IRA allows for contributions that are tax deductible. This does hinge on income level though, and you must remember that you will be taxed on earnings that you withdraw from your IRA. Anyone can set up an IRA because there are no income restrictions on this type of investment. You will be allowed to withdraw from the IRA at the age of 59 ½. Withdrawal is required once the account holder reaches 70 ½. Any withdrawals that are made before the age of 59 ½ will be assessed a penalty of 10%. There are exceptions, though, to this rule. Many types of investments can be made with the funds in an IRA, including certificates of deposit (CD), stocks and bonds.
Roth IRAs can also be used to purchase CDs, stocks and bonds like their traditional IRA counterparts. Other than that similarity, the bonds begin to differ in their make up. For starters, funds contributed to a Roth IRA are not tax deductible. You will be taxed as you contribute, but both the principal and all earnings will be completely tax free. Roth IRAs also lack a required age of distribution. Principal funds are eligible for withdrawal without penalty, though some conditions do apply. Roth IRAs do have some set up requirements. To be eligible, single filers can only make up to $95,000 and couples filing jointly can make up to $150,000 per year.
When deciding between the traditional and Roth IRA, the biggest difference to consider between each is how they are set up to handle taxes. Do you want to be taxed when you contribute or when you withdraw. Most people find that the Roth IRA makes the most sense because you will have the taxes taken care of before withdrawal and they will no longer be a concern. The downfall to the Roth IRA is the income cap that restricts eligibility.
