Traditional vs. Roth IRAs
Which IRA account is best for you?
How does a Roth IRA differ from a traditional IRA? Which type of Individual Retirement Account (IRA) should you have? You don’t need to choose. Each of these savings plans has its advantages, so some people use both.
Traditional IRAs (sometimes called ‘regular IRAs’) allow you to invest earned income before paying taxes on it. That means you have more money to invest today – depending on how much you save by not paying taxes at your current rate – and more time for those savings to grow for tomorrow.
Roth IRAs differ from traditional plans in several ways
In a Roth IRA, you pay taxes before putting money into your account. However, while your money grows in your Roth IRA, you never owe taxes on interest or compound interest as you would in non-IRA savings accounts. Like traditional IRAs, there are limits on how much you can invest in Roth IRAs each year.
Since you put after-tax savings into your Roth, you’ll never have to pay taxes on it again. When you withdraw your savings from Roth IRAs, the advantages include:
- Your money has multiplied tax-free over the years.
- You have some tax-free income if you’re in a higher tax bracket later in life.
- You can continue saving money in your Roth account beyond age 70 (as long as you have earned income).
Other advantages of opening a Roth IRA include:
- You have an extra set of savings, compound assets and tax-free income to rely on.
- You can withdraw from a Roth’s principal at any age after 5 years (all funds are available after age 59.5).
- Your estate can distribute your Roth IRA funds to your heirs without taxing them.
- Your Roth can include annuity contracts, stocks and bonds, CDs, even real estate assets.
Some folks like to own both Roth and traditional IRAs
If all your savings are tied up in traditional IRAs, your annual tax bills could be bigger than you’d like when you start withdrawing your funds. While your traditional IRA gave you a tax advantage up front, Roth IRAs can help keep taxes lower later by providing tax-free resources for some of your expenses.
After the first five years, Roth IRAs become liquid investments. You can withdraw from the principal anytime without penalty, but you’ll have to wait until age 59.5 to take out interest without paying taxes.
Depending on your income you may or may not qualify to contribute to a Roth IRA.
To find out more about Roth IRAs and traditional IRAs, along with other benefits of tax-deferred investing, contact Ron VanSurksum, Advanced Asset Management. Email: firstname.lastname@example.org or call him at (616) 531-5220 or (616) 450-8439.
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Ronald Van Surksum, CFP 4555 Wilson Ave SW – Suite 2 Grandville, MI 49418 email@example.com P: (616) 531-5220 C: (616) 450-8439 For permission to reprint: firstname.lastname@example.org