Differences Between Traditional And Roth IRAs

An individual retirement account, IRA, allows you to save money for retirement in a tax-advantaged way. This account is set up at a financial institution such as a bank or brokerage and an individual is able to save for retirement with tax-free growth or on a tax-deferred basis. There are three main types of these accounts and each type has different advantages. The main types of IRA are traditional, roth, and rollover.

With a traditional IRA, you make contributions with money that you can deduct on your tax return. This means you will not pay tax on the contributions and any earnings that your account makes can potentially grow tax deferred until you withdraw them in your retirement. As an added benefit, many retirees also find themselves in lower tax brackets than when they were in the workforce, so this tax deferral means that the money being withdrawn in retirement may be taxed at a lower rate. This means more money for you.

With a Roth IRA, you’ll make contributions with money that has already been taxed, which affords you the opportunity to grow your money tax free. In addition, the withdrawals that you make in retirement will also be tax free, since you can’t be taxed twice on the same money. There are certain conditions that must be met, however, in order for this to apply.

Lastly, a rollover IRA is a traditional IRA that is intended for money that has been rolled over from another qualified retirement plan. This involves moving eligible assets from an employer sponsored plan like a IRA to Gold.

Regardless of which type of IRA you choose, the tax benefits will allow your savings to potentially grow or compound more quickly than in a taxable account. As many financial experts estimate that you may need 85% of your pre-retirement income in retirement, and many employer sponsored savings plans may not be enough to accumulate the savings you need, it can make sense to invest in an IRA. This will not only supplement current savings but allow you to gain access to a potentially wider range of investment choices than are available with your current plan. In addition, you’ll be able to take advantage of potential tax deferred or tax free growth. To get the most out of your savings, you should try to contribute the maximum amount each year. Speaking with a professional can help you understand which form of IRA is best for you.