Is a Roth IRA better than a traditional IRA? Which one should I open as I get started with saving and investing for my retirement years? What are the main differences between them anyway? If you are looking for the answers to these questions, then you are in the right place, and my hope is that by the end of this article you will have enough information to help you make a personal decision. So read on to the end to find out more.
Roth IRAs and Traditional IRAs both offer impressive retirement benefits that you ought to consider, right before choosing to open either of them. The IRAs ( Individual Retirement Accounts) have different structures, income limits, as well as their unique pros and cons.
Traditional IRAs help you save for retirement and come with the main benefit of a tax break. If you, for instance, decide to contribute $4000 to your traditional IRA this year, you can proceed to deduct that amount on your tax returns. Doing this allows you to enjoy a break from the obligation to file returns, subject to certain income limitations, as your retirement investments continue to grow.
You are allowed to contribute funds to your traditional IRA up to the set contribution limit each year, which is $6000 for those aged below 50, and $7000 for those aged above 50. The contribution limits change from time to time, so you should confirm the annual limits for the year you decide to open your traditional IRA.
You are allowed to make penalty-free withdrawals at age 59 ½, but you can also choose to let the investment remain intact. You must, however, start making withdrawals upon hitting 72 years- these withdrawals are known as Required Minimum Distributions (RMDs). The IRS usually hits those who fail to take their RMDs with a 50% tax penalty on the amount they fail to withdraw.
Note that when you start making your withdrawals, then you will have to pay the taxes on the deductible contributions that you made, as well as the investment gains.
While Traditional IRAs defer your taxes, Roth IRAs are not designed to give you such immediate tax benefits. If you, therefore, decide to contribute $4000 to your Roth IRA in the current, you will have to contribute it as after-tax money. You will get the benefits in full when you begin to make withdrawals – all the compounded growth that has taken many years to build will all be yours to keep.
The contribution limits of Roth IRAs are similar to those of traditional IRAs. There is, however, no timestamp for when you are necessitated to make the withdrawals. You, therefore, have the liberty to withdraw the contributions right away, or you can simply leave the funds in your Roth IRA for your beneficiaries to enjoy in the future.
If you are earlier in your career, it is essential to think about the upsides of the retirement investment vehicle that you use. The more time you have between now and your retirement, the better it is for you to consider the prospects of having tax-free growth for your funds.
Checking your eligibility
If you or your current spouse have an earned income, then you have met the first requirement as far as IRA eligibility is concerned. To begin taking advantage of the set tax benefits, however, you will be required to meet the extra requirements set by the government. The first thing to note is that the income thresholds usually vary widely, based on several factors, which include:
- The filing status
- The amount of money that you intend to earn
- Whether you have an employer-sponsored retirement plan
For instance, if currently file your returns single, or as the head of household, and have an active employer-sponsored retirement plan such as a 401(k), then you should be making not more than $66,000 if you are to enjoy the full deductions to your traditional IRA. Those who are married and are earning $208,000 or more are not allowed to contribute to a Roth IRA.
It is, as such, a good idea to review the updated contribution limits as well as the deduction requirements set by the IRS each year, to verify if you can enjoy the full benefits of your IRA. Also, if you are concerned about the income restrictions, you can consider creating a type of account known as a backdoor Roth IRA (the process is quite complex, but will be worth it if you are a high-income taxpayer).
The main pros and cons to consider for each type of account
- It is possible to enjoy your tax deductions now
- Account-holders can delay the tax bill on their earnings
- You still have to pay taxes down the road
- One must make withdrawals upon hitting 72 years (the Required Minimum Distributions)
- Anyone who withdraws their money early is required to pay a 10% penalty
- All the withdrawals are yours to keep
- You are not mandated to make withdrawals if you do not want to do so.
- If you decide to withdraw your contributions, you can do so penalty-free.
- No exciting upfront benefits
- You can be tempted to start withdrawing your contributions at any time.
You can have both!
Now, if you are like most people, it can be hard to decide whether a traditional IRA or a Roth IRA is best for you. The good news, however, is that you can open a Roth IRA and a Traditional IRA, provided that your annual contributions do not go beyond the set limits. By opening both accounts, you can treat yourself to a suitable balance of tax breaks, and tax-free wealth building as you head into the future.
Or you can simply open a suitable self-directed IRA, to gain more control over your assets, and to have more options as you diversify your portfolio. Check out our review of the top-recommended Gold & Silver IRA service providers below, for a start:
Thanks for making it to the end of this article on “is a Roth IRA better than a traditional IRA?” Hopefully, you have several pointers that will help you make a more informed decision on which of the two accounts you will open, and what that will mean for you. If you have any questions or concerns about today’s post, or how you can open a self-directed IRA, drop them in the comments section and I will get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!