Here’s a rundown of what you should know about the two main types of IRA.
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LEARN MORE ABOUT: IRA Accounts

INVESTING IN A GOLD IRA: Gold IRA Account

INVESTING IN A SILVER IRA: Silver IRA Account

REVEALED: Best Gold Backed IRA

When it comes to planning for retirement, one of the key decisions you’ll need to make is which type of individual retirement account (IRA) to invest in. The two most popular options are traditional and Roth IRAs, each with its own set of benefits and drawbacks. Here’s a comparison of the two to help you determine which one is best for your situation.

Traditional IRA:

A traditional IRA is a pre-tax account, meaning you’ll receive a tax deduction for your contributions in the year they’re made, lowering your taxable income. Your investments then grow tax-free until you withdraw them during retirement. At that point, you’ll pay taxes on the amount withdrawn, based on your ordinary income tax rate at that time.

Pros:

1. Tax deduction: You can reduce your taxable income, which may place you in a lower tax bracket.

2. Tax-deferred growth: You won’t have to pay taxes on your contributions’ investment gains until you withdraw them in retirement, allowing your investments to grow faster.

Cons:

1. Required Minimum Distributions (RMDs): The IRS requires you to begin withdrawing funds at age 72 or face a penalty.

2. Uncertainty around future tax rates: Since you don’t pay taxes until withdrawal, the amount of taxes you’ll owe depends on your future tax rate, which is unpredictable.

Roth IRA:

A Roth IRA is funded with after-tax dollars, meaning you’ve already paid taxes on your contributions. However, your investments grow tax-free, and you won’t owe any taxes when you withdraw funds during retirement.

Pros:

1. Tax-free withdrawals: You won’t pay any taxes on the investment gains when you withdraw money during retirement.

2. No RMDs: There are no required minimum distributions with a Roth IRA, allowing you to leave your money in the account as long as you choose.

Cons:

1. No tax deduction: You won’t receive a tax deduction for your contributions, which could affect your take-home pay.

2. Income limits: There are income limits to be able to contribute to a Roth IRA, meaning high earners may not be able to utilize this account.

Conclusion:

Ultimately, the decision between a traditional or Roth IRA depends on your financial needs and goals. If you’re looking to reduce your taxable income now and don’t mind paying taxes later, a traditional IRA may be the option for you. But if you’re willing to pay taxes now and looking for tax-free withdrawals during retirement, a Roth IRA may be a better option. Consult with a financial advisor to determine which IRA works best for your situation.