Opening a retirement account is one of the first things to do when starting to plan for your retirement, but many people struggle to get over the hump of actually opening an account. It’s best to start as young as possible so you can reap the rewards that come along with retirement accounts, but there are some things you should know before starting.
The main types of IRAs (individual retirement accounts) are Traditional and Roth IRAs. Sometimes the Traditional accounts can go by different names, but we will stick with the most common term in this article.
Since it can be confusing trying to choose between the two, we decided to delve into the subject and try to explain the basics to give you the tools to make your own decision. Don’t get discouraged at first if you still don’t feel like this is enough info to make a final choice. It’s a big decision, so make sure you feel comfortable before starting it up.
Traditional – Contributions to these account are tax deductible depending on your income for the given year, but you will have to pay tax on any money you make when you withdraw the cash. That important fact is why a Traditional account can have some advantages if you feel like your tax rate will be higher now then when you’re ready to take the money out since you’d save the difference in tax rates.
You can put the money into a number of different investments once the money is in the account which is similar to the Roth, but there are no restrictions on your income with a Traditional account when depositing money into the account. You are required to take the money out of the account between ages 59 1/2 and 70 1/2. If you need to do it earlier than that, you will have to pay a 10% early withdrawal penalty.
Roth – A lot of people feel that Roth IRAs are more complicated, and that may be, but for many people they are a great option. The biggest thing to know right off the bat is that to put money into a Roth account you have to use money that you earned, which means that you must have a source of income from employment for this to even be an option.
As mentioned earlier, you will have to pay the taxes on this money up front, aka it’s not tax deductible. The advantage is that when you take the money out, everything you earned will be tax free. In an age where tax rates have been increasing, most people tend to think they will be at a higher tax rate when they retire, thus choosing the Roth for the tax advantages.
Another requirement has to do with your income. Whether or not you can deposit, and how much you can deposit, has to do with your income and filing status. This varies depending where you live so that topic spans too wide for this article. Your accountant will be able to fill you in completely on those details.
As with the Traditional IRA, you can use your money in the Roth IRA towards most normal investments. Including the stock market, Deposit Certificates, Bonds, etc.
Conclusion – It’s a big decision, but any way you go is probably going to be better than ignoring your retirement. If you have an accountant, tax adviser, or financial adviser, you should think about sitting down with them to discuss which option is best for you. Hopefully this article has provided you with a little more background information to make the discussion a little more productive.
If you need a Roth IRA Calculator, or a Roth IRA Conversion Calculator, please visit those links and see some actual numbers based on your stats.
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