An individual retirement account (IRA) is a means to save for retirement while also saving taxes. Designed largely for self-employed individuals who do not have access to an employer retirement plan such as a 401(k). Traditional IRAs and Roth IRAs are the two varieties of IRAs.
Though their objectives are identical, regular and Roth IRAs differ in important respects.
Roth IRA vs. Traditional IRA:
Taxes: The distinction between a standard IRA and a Roth IRA is based on taxes. A Roth IRA allows you to contribute cash on which you have already paid income taxes, sometimes known as post-tax income. A typical IRA allows you to contribute money that has not yet been taxed, known as pre-tax income, which can lessen your taxable income today. Do you suppose you are in a lower income tax bracket now than you will be in retirement? If so, make a post-tax contribution to a Roth IRA. You pay income taxes up front, but the amount may be significantly lower than if you were to pay taxes on retirement withdrawals. Contribute pre-tax income to a traditional IRA if you believe your income tax band will be lower in retirement. You will have to pay income tax on withdrawals in retirement, but the cost may be less than if you paid now.
Early Withdrawals: A Roth IRA offers the flexibility of early withdrawals. Because a Roth IRA account is funded with money you've already paid taxes on, you can withdraw contributions tax-free and penalty-free at any time. Traditional IRA withdrawals are normally only accessible after you reach the age of 59. You can still take early withdrawals from a traditional IRA, but you'll owe income taxes and, in most cases, a 10% early withdrawal penalty to the IRS. Similarly, early withdrawals of earnings from a Roth IRA must be taxed, and you may be subject to a 10% IRS penalty. For a limited number of IRS-approved purposes, you can avoid the 10% penalty on early withdrawals from a traditional IRA or early withdrawals of gains from a Roth IRA. These include permanent disability, paying higher education expenses or substantially equal periodic payments (SEPPs) under rule 72(t).
Minimum Distributions Required: Roth IRAs differ significantly from standard IRAs once you retire: there are no required minimum distributions (RMDs) with a Roth IRA. All other tax-advantaged retirement accounts require you to start withdrawing funds when you reach the age of 72. RMD amounts are computed annually based on your life expectancy and overall account balance, but you are not required to spend your RMDs. The ability to avoid required withdrawals in retirement might be a significant benefit of a Roth IRA.
Choosing:
For most people, the only advantage of a regular IRA is the tax break. And we're not ignoring this benefit: it can be a major advantage for high incomes and a wonderful incentive for folks who might otherwise forego retirement savings. In the short term, it effectively makes saving for retirement "cheaper," because the tax savings each year reduce the cost of your contributions. However, you will eventually have to face that tax burden in retirement, so unless you absolutely need that upfront tax reduction, a Roth IRA is hard to beat.
sources:
https://www.investopedia.com/terms/r/rothira.asp#toc-roth-ira-vs-traditional-ira
https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/
https://www.nerdwallet.com/article/investing/roth-or-traditional-ira-account
https://www.forbes.com/advisor/retirement/roth-ira-vs-traditional-ira/
https://www.bankrate.com/investing/traditional-ira-vs-roth-ira/
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