What’s the difference between a Roth and Traditional IRA?

Most employed individuals are recommended to save part of what they earn today for the sole purpose to invest those funds for their future. This is one good way to get the kind of comfortable retirement and financial security that all of us want. One great example of an investment vehicle that is designed for the retirement of employed individuals is the Individual Retirement Account, or IRA. The next question is, what is an IRA?

As mentioned, an IRA is a kind of investment vehicle which is specifically intended for the retirement of the account holders. Employed individuals are allowed to make contributions to an IRA as long as they are earning a taxable income during the same year. This income may be in the form of salaries, wages, commissions, bonuses, and the like.

The IRA can hold several types of investment accounts, and so it would be easier for the account owners to diversify their funds and create a better investment portfolio. It is essential for the account holders to open their IRA with the best IRA company so to maximize their returns. There are IRA rules and regulations that need to be followed so that the account holders will get the most benefits out of their retirement account. These rules actually may vary depending on the type of IRA plan you select.

Types of IRA Plan

Generally, there are 4 types of IRA plans available, but only two are most popular and commonly used. These are the Roth IRA and the Traditional IRA. Knowing the difference between Roth IRA and Traditional IRA is very important to help you find out which type of IRA plan is best for you.

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Both IRAs require their contributors to be earning taxable income in order to be qualified. However, there are other eligibility rules that must be complied with so that aspirants may be qualified to make contributions.

With a Traditional IRA, the contributors must be younger than 70 and 1/2 years of age to be able to make contributions. There is no age limit for Roth IRA — however, the Internal Revenue Services (IRS) has set the maximum income limits based on the tax filing status of the individuals to be eligible to make Roth contributions.

Payment of Taxes

The contributions that are made to a Traditional IRA are tax-deferred. This means that taxes will be paid only upon withdrawal. On the other hand, the Roth IRA taxes are paid right at the time the contributions are made. This is a good thing for some people especially for those who are expecting to belong to a higher income tax bracket in the future.

With a Roth IRA, the profits or returns that an investor can earn from his investment are totally free of taxes and fees. However, the Roth account holders must meet the required parameters so to be eligible for tax-free withdrawals.

Roth vs Traditional IRA: Which is Right for You?

There are plenty of speculations as to which type of IRA plan is the best. This actually depends on the particular needs and priorities of the investors. If you like to enjoy tax-free growths, and you think you can meet the rules, then consult a broker or financial adviser on how to open a Roth IRA, because this is definitely the best one for you.

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