What’s the Difference Between Roth and Traditional IRA?
Is it too late or too early to start thinking about retirement? While the concept of retirement has drastically changed in recent decades, it still pops up in our minds every so often. Whether you are a young professional who landed a salaried position or a seasoned veteran who is playing a game of catchup, your golden years always seem like they are lurking around the corner.
Indeed, as soon as you get a job, it is time to start saving and investing for your senior days. You can explore many investment avenues to ensure you have a nest egg for your 60s, 70s, and 80s.
One of the first things you can do is look into an IRA, also known as an individual retirement account. This is a financial product designed for long-term savings and investing; therefore, if you’re planning on regularly dipping into this account, this account may not be the right fit for you.
Once you decided to open a retirement account, you will need to choose between a traditional IRA and a Roth IRA. Read on to learn more about these great retirement saving options to understand which would be a better fit for your long-term financial goals.
Roth IRA vs. Traditional IRA: A Primer
The main difference between the two IRA programs are their respective tax implications.
With a traditional IRA, you contribute pre- or after-tax dollars to your account. Your money will grow tax-deferred, and any subsequent withdrawals will be taxed as current income once you have reached the age of 59 1/2.
A Roth IRA operates differently. You contribute your after-tax dollars, your capital increases without being penalized by the Internal Revenue Service (IRS), and you can enjoy tax-free withdrawals after 59 1/2.
Put simply, a Roth IRA is tax-free, and a traditional IRA is tax deferred. One allows you to enjoy tax-free withdrawals in the future, while the other delivers tax benefits today.
It is also important to remember that your maximum contribution figure for 2021 will be $6,000 ($7,000 if you are over 50).
What’s Best for You?
Now, you might be wondering which product is right for you. At its simplest:
- A traditional IRA is best for somebody who anticipates being in the same or lower tax bracket when withdrawals start taking place.
- A Roth IRA is suitable for individuals who expect to be in a higher tax bracket upon the beginning of withdrawals.
Everyone Is Different
There is no single answer to the question of which retirement savings option is superior. Everyone has unique needs, different income status, financial situations, and retirement goals, and each of these factors will impact which IRA will deliver the best benefits now, and in your retirement years.
Plus, circumstances may change. In addition to Social Security benefits, you might decide to do some freelance, gig work, or consulting upon retirement. There are so many factors to think about when deciding which investment choice is the best for you.
Do your due diligence, crunch the numbers, define your goals, and congratulate yourself that you are taking your retirement seriously!