Comparing Roth IRA vs Traditional IRA
Deciding between a Roth IRA and a Traditional IRA can be a tricky choice for many investors. While both of these retirement accounts are widely used to save for retirement, they have distinct differences in the way contributions and withdrawals are taxed. Here, we will compare each of them and discuss the pros and cons of each account.
The biggest difference between a Traditional IRA and a Roth IRA is the way that you are taxed. Contributions to a Traditional IRA are tax deductible, meaning you can claim them on your tax return, but you will pay ordinary income tax on withdrawals. A Roth IRA, on the other hand, is funded with after-tax contributions and the withdrawals are tax-free. That means you don’t pay income tax on the money when you take it out of the account, as long as you wait until you are 59 ½ to take withdrawals. Both contributions and earnings are exempt from tax.
Another difference between the two types of accounts is the availability of tax deductions. Contributions to a Traditional IRA are tax-deductible, while contributions to a Roth IRA are not. That means that you can reduce your tax bill by contributing to a Traditional IRA. Furthermore, you may be able to deduct your Traditional IRA contributions if you or your spouse is covered by an employer sponsored retirement plan, depending on your income level.
Finally, contributions to both Traditional and Roth IRAs have annual limits. For the 2021 tax year, the maximum annual contribution to a Traditional IRA or Roth IRA is $6,000, or $7,000 if you are age 50 or older. That means that you cannot contribute more money to either account between now and April 30, 2022. Additionally, both accounts have restrictions on income levels and types of investments, so be sure to do your research before deciding which account is right for you.
When considering whether to open a Traditional IRA or Roth IRA, it’s important to think about how long you will be investing and your future tax rate. If you are in a lower tax bracket right now, it may be beneficial to choose a Traditional IRA, since your current tax rate could be lower than your rate at retirement. But if you anticipate being in a higher tax bracket at retirement, then a Roth IRA may be the better choice. Additionally, a Roth IRA could provide you with more flexibility when you need to take withdrawals in retirement, since you won’t have to worry about owing any income tax. Ultimately, both Traditional and Roth IRA accounts are great options for retirement savings, so it’s important to research each and decide which is the best fit for you.