Traditional IRA or Roth IRA – Which is Better for You?
How to make sure you are well taken care of post-retirement? The commonly used retirement plan is usually 401k that is sometimes set up by employers for their company personnel. However, for self-employed people, and for those who don’t have a 401k plan, there are two other options available as the primary retirement account – Individual Retirement Accounts (IRAs) and Roth Individual Retirement Accounts (Roth IRAs).
What are IRAs and Roth IRAs?
These are tax-deferred plans that must be set up and operated personally by the account holder. Some firms are now establishing and managing IRA for their clients with an initial low-figure investment and maintenance fee. There are limits on the total amount that can be invested in an IRA, which is same for both plans – it is $5,500 for those under age 50 and for those above this age, it is $6,500, since there is an additional 1000 catch-up option for them. There are regulations for making qualified withdrawals for both accounts; as long as you adhere to this limit there are no penalties. The rules state that an account holder should be over 59.5 years old to withdraw the cash and the money should be in the account for a minimum of 5 years. There is a clause for hardship withdrawal too, where the account holder can make a non-qualified withdrawal without penalty for reasons such as medical bills, education expenditures, buying a property etc.
Differences between the two
When you deposit to a traditional IRA, it is subtracted from the taxable income. For instance, if you earn $45,000 and contribute $5000 to your IRA, the final income appears as $35,000. When it comes to Roth IRA all the cash that is deposited is post tax, which is a part of your taxable income. The Roth IRA account is suited for emergency purposes as well since the taxes have already been levied on the money in it, so it can be withdrawn at anytime. This is only applicable for the principal amount though, because the earned interested can be withdrawn only if it qualifies for withdrawal, which is similar to a traditional IRA. An added bonus is that the income is not taxed after withdrawal, but a traditional IRA demands that the income will not be taxed when the sum is deposited, but the taxes will be levied after it is taken out. Therefore, the Roth earnings are not taxed at all!
To know more about which option is better for you, the calculations based on your data, have to be done correctly. An automated calculator can help you decide better – think about the figures and then make up your mind.