Gold Retired

  • Buying Guide
  • Learn
    • 401k to Gold IRA Rollover Guide
    • #1 Recommended Gold & Silver IRA Solution!
    • Avoid Gold IRA Scams! | (Learn how)
    • Investing in Gold for Beginners | Basics & Tips
    • Top-5 List of Gold Investment Companies | U.S. 2023
    • What is a Gold IRA?
    • What is a 401k to Gold IRA rollover?
    • What is Numismatic Gold Coins? | BEWARE!
    • Gold IRA Pros and Cons
    • Gold IRA Rules and Regulations | 2022
    • Top-5 Gold & Silver IRA Companies | 2022
    • Top 5 Best Gold Coins – Investors Favorite Picks
  • Reviews
    • Augusta Precious Metals
    • Goldco Precious Metals
    • American Hartford Gold
    • Birch Gold Group
    • Advantage Gold
    • Noble Gold
    • Oxford Gold Group
  • Blog
    • Central Bank Digital Currency in USA – Is it being introduced?
    • Why Gold Hedge Against Inflation | one-eyed man in the kingdom of the blind
    • Where do wealthy people invest their money?
    • Gold in War | Why is it a good idea?
    • What Does the Bible Say About Retirement? | Gold & Silver?
    • How to Invest in Gold? | Different Ways You Can Do It
    • Gold Vs. Silver Investment | What makes most sense to you?
    • How to Protect Your 401k From a Market Crash | 6 Best Tips!
    • Gold IRA Scams! | Learn How to Avoid Them!
    • Roth IRA versus Traditional IRA | What Are The Differences?
    • Is it Worth Investing in Gold? Your Freedom is Under Attack!
    • What is IRA Basis? | Simple Explanation
    • 16 coins to have in a Cryptocurrency IRA | New 21/22 List!
    • What is The 702(j) Retirement Plan? | Not a Smart Idea?
  • My #1 Recommendation

Roth IRA versus Traditional IRA | What Are The Differences?

February 1, 2022 by Eric 2 Comments

Roth IRA vs. Traditional IRA

Today we shall look at Roth IRA versus Traditional IRA. The main aim of this article is to establish the differences between the two types of IRAs, in a bid to enable you to know which one is right and best for you. If that sounds good to you, then read on till the end of this article to find out more.


P.S:Checkmark

See our top-5 recommended Gold & Silver IRA Service Providers


Introduction

Traditional IRAs and Roth IRAs mainly differ in how and when an account holder’s money is taxed. Depending on your financial goals and objectives, either can be good for you or not good for you. You, as such, have to be very careful when making your choice, to ensure that you do not make the mistake of choosing one instead of the other, then ending up losing more money than was necessary, in the form of taxes.

Here’s how you can choose the account that is best for you.


Roth IRA Vs Traditional IRA: Which one do I choose?Roth IRA versus Traditional IRA

The main difference between these two types of IRAs, as already highlighted, is when and how you get taxed. For a traditional IRA, all the contributions you make to the account are tax-deductible, but the withdrawals you take upon retiring are taxable. With a Roth IRA, on the other hand, your contributions to the account are not tax-deductible, but all the withdrawals you take upon retiring are tax-free.

Depending on the outlook of the global economy, and your set retirement goals, you can choose the type of IRA that will best favor your objectives. Here are some other features of the traditional and Roth IRAs that are worth considering as you make your decision.

Roth IRAs

  • The is a no-immediate tax benefit for the contributions made.
  • One can withdraw their contributions at any time without being taxed or penalized
  • Your ability to contribute to your Roth IRA is phased out if you have a high income
  • All the qualified withdrawals during retirement years are tax-free.
  • The contribution limit is $6000 (or $7000 for those 50+ years – the extra $1000 is known as a catch-up contribution).

Traditional IRAs

  • If deductible, all the contributions you make will reduce your overall taxable income in the year that you make them.
  • Your deductions can be phased out depending on your current income.
  • All your distributions during your retirement years will get taxed as ordinary income.
  • Upon hitting age 72, you will be required to take the Required Minimum Distributions (RMDs).
  • All unqualified/ early withdrawals attract a 10% penalty that’s accompanied by the income taxes
  • Contribution limit is $6000 (or $7000 for those 50+ years)

Generally, if you are asking yourself whether or not to open a Roth IRA vs a Traditional IRA, the main question to ask yourself is whether you expect the tax rates to be higher in the future than they are in the present moment.

Personal decisionidea

If you can answer this question with certainty, then you can without a shadow of doubt choose the account that’s best for you, as you look forward to making maximum tax savings.

Also, if you foresee a situation in which you will be in the higher tax bracket during your retirement years, then you should highly consider opening a Roth IRA, owing to its delayed tax benefit. If, on the other hand, you suspect that you will have lower rates during your retirement years, a traditional IRA is good for you, since it has the upfront tax advantage.

The truth of the matter, however, is that it’s hard to establish what your tax rate during retirement will be, more so if you are a couple of decades away from downing your tools of work. The good news, however, is that there are some other ways through which you can determine whether a Roth IRA or a Traditional IRA is best for you.

**See my #1 recommended gold & silver IRA solution instead


Checking your eligibility

Based on the IRS rules on IRA eligibility, you can decide whether a Roth IRA or Traditional IRA is best for you. Your annual income will determine:

  • Whether you are eligible to contribute to a Roth IRA.
  • The amount of money you contribute to your traditional IRA can be deducted from your annual taxable income. Note that your traditional IRA deductibility is restricted only in the case that you or your spouse can access a workplace retirement savings plan such as a 401(k)

Note:

  1. If you do not qualify for a Roth IRA but you still prefer opening one, you can try opening a backdoor Roth IRA.
  2. You can also decide to contribute to a Roth IRA and a Traditional IRA at the same time provided that your total contributions do not go beyond the set contribution limits ($6000 for those below 50 years, and $7000 for those aged 50 or more).

Why do most people prefer Roth IRAs?What is the difference between Roth IRA versus Traditional IRA?

You do not have to act based on what is popular, but it also doesn’t hurt to know why people opt to make decisions in the manner in which they do. Here are some reasons why people tend to choose Roth IRAs:

  1. You are not limited by the early withdrawal rules

Although it is not a good idea to make early withdrawals from a retirement savings account, there are times in which you may need some money without having to worry about paying income taxes. In this case, a Roth IRA is suitable for you.

  1. No Required Minimum Distributions

Unlike a Traditional IRA, you are not required to start taking Required Minimum Distributions upon hitting 72 years. This presents you with the freedom to let the funds in your IRA grow for as long as you want them to.

  1. Depending on how disciplined you are at saving, you will end up with more after-tax money by opening a Roth IRA

As much as both types of IRAs offer tax breaks, there happens to be an overlooked benefit when it comes to the Roth taxes. Your tax breaks do not come until retirement, which eliminates the temptation of spending the money before then.

With a traditional IRA, on the other hand, the tax benefits come annually, and unless you are disciplined enough to reinvest them, you may end up spending this money on unnecessary flashy stuff.

The decision on whether to open a Roth IRA Vs. Traditional IRA is often a tough call for many, but you now have enough pointers to help you decide more easily. The IRS also allows you to open a self-directed IRA, which comes with more tax benefits and presents you with more investment options and choices.


Frequently Asked Questions on Roth IRA Vs Traditional IRA 

1. How do I convert my traditional IRA to a Roth IRA? Thinking

Investors can convert their traditional IRA to a Roth IRA through one of the following ways:

  • Rollover – Here, you receive a distribution from your traditional IRA that you are required to contribute to the newly-created Roth IRA within 60 days after receiving the distribution. 
  • Custodian-to-custodian transfer- You can authorize your traditional IRA custodian to transfer a specified amount of money to the custodian of the newly-created Roth IRA. 
  • Same custodian transfer – if your traditional and Roth IRA are overseen by the same institution, you can tell the custodian to transfer a certain amount of money from the traditional IRA  to the Roth IRA. 

2. Can I use my Roth IRA or Traditional IRA to invest in real estate?

No. The IRS does not allow you to use your Roth or Traditional IRA to invest in real estate projects. You have to create a self-directed IRA to invest in real estate projects and other non-traditional investments such as cryptocurrencies and precious metals. 

3. Which assets am I not allowed to invest in through my traditional or Roth IRA? 

The law prohibits investors from using their IRA funds to invest in collectibles or life insurance. For clarification purposes, collectibles include:

  • Artwork
  • Alcoholic beverages 
  • Antiques 
  • Gems 
  • Stamps 
  • Coins 
  • Metals 
  • Rugs 
  • Tangible personal property 

4. Are the Roth IRA rules similar to those of traditional IRAs?

Not all of them. Whereas most of the rules that govern Roth IRAs and Traditional IRAs are similar, there are some clear-cut differences, such as the time one gets a tax deduction. Whichever account you decide to open, therefore, you should take the time to understand the rules and regulations surrounding it, so that you can avoid getting hit with penalties and taxes by the IRS. 


Check out some of our other posts on self-directed IRAs, rollovers, etc:Gold IRA recommendation

Also read: What is a 401(k) to gold IRA rollover?

OR

Gold Retired’s Top-5 Recommended Bitcoin IRA Solutions


That will be all for this article in which we have looked at Roth IRA versus Traditional IRA. I hope that you enjoyed reading it and gaining some new information on the two individual retirement accounts. Let me know if you have any questions about today’s topic or about self-directed accounts –drop them in the comments section and I will be more than happy to get back to you right away.

I wish you well,

Eric, Investor and Team Member at Gold Retired!

Filed Under: Retirement

Comments

  1. Jannette says

    February 2, 2022 at 10:09 am

    Thanks for the explanation of Roth IRA and Traditional IRA, now understand the IRAs better. After reading your article with the comparison think the Roth IRA is the better option. I like that you can withdraw from your IRA without being taxed, no one likes to have to pay tax on the money they have already earned and possibly had tax deductions taken out on that money when they received their paycheck. 

    Reply
    • admin says

      February 2, 2022 at 6:15 pm

      First of all, thank you for your comment!

      We are very happy to hear that you found the post interesting and valuable!
      Yes, it is individuall on what kind of IRA suites the best, and apparently for you it would be a roth IRA.

      Thank you again for your comment!

      /Best

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Trending from blog

  • Central Bank Digital Currency in USA – Is it being introduced?
  • How to Protect Your 401k From a Market Crash | Some Tips!
  • What the Bible Say About Retirement? | Gold & Silver IRAs?
  • Where do wealthy people invest their money?
  • How To Write a Retirement Speech | 6 Tips To Get You Started

Important pages

  • 401k to Gold IRA Rollover Guide | 5-Steps
  • Our #1 Recommended Gold & Silver IRA Solution
  • Avoid Gold Scams! | (7-Minute Read)
  • Top-5 Gold IRA Companies 2023
  • 2023 Buying Guide (gold & silver for any budget)
  • How To Invest In Bitcoin – From Your Retirement Account
  • How to avoid Bitcoin Scams
  • 401k to Gold IRA Rollover Guide | 5-Steps
  • Our #1 Recommended Gold & Silver IRA Solution
  • Avoid Gold Scams! | (7-Minute Read)
  • Top-5 Gold IRA Companies 2023
  • 2023 Buying Guide (gold & silver for any budget)
  • How To Invest In Bitcoin – From Your Retirement Account
  • How to avoid Bitcoin Scams

Useful Links

  • About Us
  • Contact Us
  • Affiliate Disclaimer
  • Privacy Policy

Gold Retired © 2023 | All Rights Are Reserved

  • See #1 Recommended Gold & Silver Firm