Understanding the Roth and Traditional IRA
The individual retirement account (IRA) allows you save up to $5,500 a year for retirement. With a Traditional IRA, you fund the account with pre-tax earnings and reduce your income tax burden in the year that you make the contribution. With a Roth IRA, you fund the account with after-tax earnings, and the money will compound and can be withdrawn income tax-free.
The Benefits of a Traditional IRA
A traditional IRA may be beneficial for those who believe that their tax rates will be lower in retirement than they are today. This is because the tax savings that you get now may be more than the taxes that you pay later when the money is withdrawn. For some, it may be better to get a guaranteed tax break now as there is no guarantee that Roth IRAs won’t be taxed differently in the future.
The Benefits of a Roth IRA
The biggest benefit to having this type of IRA is that you don’t face an early withdrawal penalty when you withdraw money that you contributed to the account. For example, if you contributed $5,000 in 2010, you can take that money back without incurring a penalty. Another benefit is that there are no minimum distributions, which means that you can keep the money in your account for the rest of your life if you want.
You Can Have One of Each
The law allows individuals to have as many IRAs as they want. Retirement experts say that having one of each can help minimize your tax burden today and in the future. It may also be a good way to diversify your overall investment portfolio. Regardless of how many IRAs you have, you can’t contribute more than $5,500 a year to those accounts.
Regardless of how you choose to save for retirement, it is important that you start doing so as soon as possible. In addition to possible tax benefits, the money in your account will have longer to compound the earlier you start saving.