One of the most important things you can do to secure your future is invest in a retirement fund. The harsh reality is that pensions and severance packages are becoming a thing of the past, and the fate of government programs such as Social Security is shaky at best. It is becoming up to the individual wage earner to save and invest enough money in order to retire comfortably – or at all!
One of the best ways you can save and invest for the future is through an individual retirement account, or IRA. There are two main types of individual retirement accounts, a Roth IRA and a traditional IRA, and the majority of people are eligible to contribute to these funds.
When comparing Roth IRA vs traditional IRA it is important to keep in mind that both types of accounts have their benefits and drawbacks, and there is no one-size-fits-all solution to retirement. Many online brokerages that offer individual retirement accounts such as ETrade, offer fund screeners and retirement advisers that can best assist you in choosing the retirement vehicle that is best for you.
Roth IRA Vs Traditional IRA: Traditional IRAs
Traditional IRAs are tax-deferred retirement vehicles where contributions to the account may be tax deductible depending on the investor’s tax filing status, income and additional factors. The contributions to a traditional IRA are made on a pre-tax basis, which means that the funds are invested prior to being taxed.
By investing pre-tax dollars, you may be able to lower your current tax bracket, as well as watch your investment grow tax-free until they are withdrawn. A qualified withdrawal is treated as ordinary income, and could be subject to ordinary income tax.
While everyone is eligible to invest in a traditional IRA, not everyone is eligible for the tax deduction. Speak with a qualified financial adviser to find out of you qualify for the tax deduction in a traditional IRA. The advantages of a traditional IRA deal mostly with taxes, and your savings in a traditional IRA may be enough to lower your personal income tax bracket.
A drawback to a traditional IRA is the minimum required distribution. This requires investors in a traditional IRA to withdraw a certain portion of their capital when the owner of the account reaches the age of 70½.
If you feel that your income tax bracket will be lower when you retire, a traditional IRA would be an excellent option for an individual retirement account.
Roth IRA Vs Traditional IRA: Roth IRAs
Roth IRAs are tax-exempt investment vehicles, where contributions to the fund are taxed at your personal income tax rate, and then may be withdrawn tax-free when you need them. An investor must meet certain income and contribution limits, which are updated for inflation periodically.
Consult with a qualified retirement specialist at a reputable broker like ETrade to find out if you fall within the income limits of Roth IRAs.
In a Roth IRA, principle investments can be withdrawn tax-free at any time, adding to the flexibility of this type of investment vehicle, and making it unlike any other account of its kind. When considering a Roth IRA vs traditional IRA this flexibility makes investors lean toward the Roth account.
The drawbacks to a Roth IRA are the limits placed on contributions, as well as the income requirements.
As always, there is a lot to consider when looking at retirement funds, and you should carefully research every potential investment prior to investing.
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