All Financial Wisdom

Roth IRA versus Traditional IRA

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Differences

Looking at a Roth IRA and a Traditional IRA, you must understand the differences, since you can only contribute $5,500 per year to either of them.

Roth IRA
In a Roth IRA, you are not getting an immediate tax benefit by contrition get to it. You are contributing after-tax money each year. Once you turn 59 1/2, you may withdraw penalty and tax free. However, you have to make below a certain amount before you can contribute directly to a Roth IRA. The work around is to do conduct a rollover of a traditional IRA to a Roth IRA each year.

Traditional IRA
With a Traditional IRA, you contribute with tax-free dollars and then have to pay taxes once it is withdrawn. This means, after contributing to an IRA, your taxable income is decreased by that amount. Once you reach 70 1/2, you must make yearly withdrawals, however.

Which one is for you?
When looking into which one is for you, look at your other retirement options. Most employers have 401(k) retirement plans and may even provide a match to a certain amount or percentage. This is considered free money and I highly suggest you match up to that point.

If you have a 401K plan through your employer, you should consider a Roth IRA. The 401(k) acts similar to Traditional IRA and therefore you should look into diversifying your retirement income. Some employers may provide the less common Roth 401(k), which as you guessed, acts similar to a Roth IRA, and therefore, you should look into a Traditional IRA.

References:
Boglehead Wiki article on Roth IRA http://www.bogleheads.org/wiki/Roth_IRA

Boglehead wiki article on tradional versus Roth http://www.bogleheads.org/wiki/Traditional_versus_Roth

Wall Street Journal guide to 401(k) http://guides.wsj.com/personal-finance/retirement/what-is-a-401k/

2 Comments

  1. expatdirectory

    April 22, 2015 at 3:39 am

    Very good points and considerations. for info, you can compare ROTH and Traditional IRA retirement finance forecasts using this calculator – http://www.icalculator.info/finance/retirement-comparison-calculator.html

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