Roth IRAs versus Traditional IRAs

Saving for your retirement years is something that every individual should have on the top of their list of financial priorities. It is recommended that retirement savings begin as early as possible in life in order to gain the maximum benefits of long term investment strategies.

There are two basic types of Individual Retirement Accounts (IRAs) that are popular among individuals or married couples saving money toward retirement. Here we look more closely at Roth IRAs, Traditional IRAs and the difference between the two types of retirement accounts.

Roth IRA

If you are considering opening a Roth IRA, it is important you understand the advantages of this type of retirement account as well as potential drawbacks. In order to contribute to a Roth IRA you must make contributions from money earned. This means you must have some sort of income, whether from self employment or wages earned through other employment.

As a qualifying contributor to a Roth IRA you will be required to pay income tax on contributions to the account, however this can be a benefit in that you have fewer restrictions and are not required to pay tax on earnings or tax on principal money that is withdrawn from your account at any time. Money invested can be used to purchase a variety of investments such as stocks, bonds and certificates of deposit. There are income requirements that must be met in order to contribute to a Roth IRA. These income requirements are based on your modified adjusted gross income and vary based on the status you file on your income tax return.

Traditional IRA

When contributing to a Traditional IRA, your contributions are tax deductible (based on income level). You will be required to pay income taxes when you withdraw the money. Distribution of earning and principal monies are subject to a 10% early withdrawal penalty if removed from the account prior to age 59 1/2. You must withdraw your money between the ages of 59 1/2 and 70 1/2. Like the Roth IRA, contributions to a traditional IRA can be used for a variety of investment vehicles. There are no income restrictions when contributing to a traditional IRA.

There are definitely differences between the two retirement accounts, which should be considered before making the final decision as to which type of account offers the best benefits for your financial situation. The most obvious and biggest difference is how the money is taxed with contributions to Roth IRAs taxed up front and contributions to traditional IRAs taxed upon withdrawal. Other differences include age and income restrictions as well as restrictions and penalties associated with removing your money prior to retirement age.

Deciding which type of account is right for you requires taking the time to learn as much as possible about each type of account and understanding how to properly manage your account over time to gain the maximum benefits allowed. Regardless of which type of IRA you feel is right for you, the benefits of either retirement account are worth the investment. Saving for retirement is necessary in order to live comfortably and with the peace of mind your financial situation will not be a burden on yourself or loved ones when you reach retirement age.