Roth IRA vs. Traditional IRA: Choosing Which One Works Best for You

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Obviously, it’s hugely important to avoid any mistakes with money of any amount. It’s doubly essential, however, to take caution when you’re saving for retirement. Individual Retirement Arrangements (IRAs) are popular, as they allow for tax-free savings that one can access in retirement. There different types of IRAs for one to consider when making a retirement investment, with the two most popular being Traditional IRAs and Roth IRAs. These two come with their various pros and cons and must be weighed according to your investment and retirement needs.

The Lowdown on Traditional IRAs

Traditional IRAs are tax-deferred in that they will grow throughout your lifetime and allow you to both contribute money pre and post those funds being taxed.

However, you have to be in it for the long haul, as Traditional IRAs restrict their owners to withdrawing their cash until they are 59-and-a-half years old. After that, the money you receive from the Traditional IRA is treated as income.

Pros of the Traditional IRA

You can claim contributions: When you file for taxes, your Traditional IRA contributions can count towards a tax deduction. You are allowed to claim up to $5,000 under this designation.
No tax charged on funds in the account: The funds stored in your Traditional IRA are safe there. They will not be subject to taxes, which can be helpful when you are mapping out your future, as stability is key.
Anyone welcome: Well, basically anyone. If you have the minimum amount to set up a Traditional IRA, you are welcome to open one up a Traditional IRA. There is also no ceiling on those that are near the top of the tack bracket, like there is with a Roth IRA.

Cons of the Traditional IRA

Once withdrawn, you are vulnerable: Starting a Traditional IRA takes a certain level of stability, because your tax bracket shouldn’t be moving all around the place. You want it to be stable to be able to deal with the flux of taxable income that you will incur once you finally withdraw the funds. The stakes are high then, as withdrawals from your Traditional IRA will incur tax deductions. The investments into your Traditional IRA are pre-tax, so the income will b treated as taxable the second it comes out.
Tax penalties: Once again, stability is key when investing in a Traditional IRA, as if you withdraw money from the account before retirement, you will incur tax fees. Because the money in the account is pre-tax, you will owe income taxes on whatever you withdraw, in addition to another 10% penalty.
Forced withdrawal: IRA accounts can be fraught with age restrictions and Traditional IRAs aren’t different in this regard, as you must start making withdrawals from your Traditional IRA six months after you turn 70. It doesn’t matter if you’re still working at that point, either.

The Lowdown on Roth IRAs

The main difference between the two major kinds of IRAs is the money that you put into the accounts. First, Roth IRAs may feature different kinds of investments other than pure cash, as they take into account stocks and bonds. Secondly, the cash put into a Roth IRA is income that has already been taxed. Thus, the rules around Roth IRA accounts and withdrawals are slightly different. The age restrictions for withdrawing from a Roth IRA are lifted six months after a person’s 59th birthday (or in the case of disability).

Pros of the Roth IRA

Tax-free funds: After retirement, your funds are, of course, tax-free, because income tax was already accrued when the money was first invested.
Inheritance: Your estate, which includes your Roth IRA, will be passed to your beneficiaries, and they will be able to withdraw investments from the account.
Free to keep investing into your 70s: While there is the 59-and-a-half age restriction, you’re not forced to withdraw from your Roth IRA after you turn 70, as with Traditional IRAs.

Cons of the Roth IRA

No tax deductions: Because you’re able to enjoy a tax-free withdrawal after 60, Roth IRA investments cannot be deducted from your taxes every year.
Income limits: You must qualify for a Roth IRA, and to do so you must be making less annually as a single person than $125,000. The limit for a married couple that files taxes together is $183,00.
Higher tax bracket penalties: You must be somewhat certain of the future of your income and what your balance will look in the years after you set up a Roth IRA. If you move into a higher tax bracket when you retire, you won’t able to deduct the contributions after you retire, either.

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