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A traditional IRA is a retirement savings plan that offers tax-deferred savings until withdrawn in retirement.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 It means that when you withdraw money from a Roth IRA, you won’t have to pay income taxes on any amount withdrawn if certain conditions are met.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