Traditional and Roth IRAs are both great options for retirement savings. But which one should you choose? Deciding on one or the other can certainly be confusing. And mistakes can cost a fortune in retirement!
What is a traditional IRA?
A traditional IRA is a retirement savings plan that offers tax-deferred savings until withdrawn in retirement. The IRS does not assess capital gains or dividend income taxes in a traditional IRA. And withdrawals or distributions get taxed as regular income in retirement.
What is a Roth IRA?
A Roth IRA is a retirement account that is funded with after-tax money, and earnings growth and withdrawals are tax-free in retirement. It means that when you withdraw money from a Roth IRA, you won’t have to pay income taxes on any amount withdrawn if certain conditions are met.
Contributions: Order of operations
Investments grow tax-free in Roth accounts. And distributions are also generally tax-free in retirement. Savvy investors will quickly realize the benefits of maxing out both Roth accounts first. For those who aren’t lucky enough to have an employer match with a 401(k), the Roth IRA should be the first account to get funded for retirement.
What if I need the money sooner than retirement?
Withdrawals in either a traditional or Roth IRA before age 59 ½ are usually subject to a 10% penalty, and the amounts are added to your income (Read: Don’t do it). However, there may be a time you need the money sooner. For example, if you want to buy a home, you can withdraw