Essay On Roth Ira Vs. Traditional Ira

594 words - 3 pages

A Roth IRA is a unique method of investing used by smart individuals to save for a richer retirement. By placing a sum of money into a Roth IRA, you are saving for a better future and a quicker retirement. Over the years as you add more and more money into your Roth IRA account, it compounds into a much larger sum of money. A Roth IRA is tax friendly as well. Atlanticfinancial.com says, "although contributions are not tax deductible, withdrawals are tax-free as long as they are made after age 59½ and the account has been in existence for at least five years". Atlantic Financial.com also says Roth IRA distributions are free of taxes if "you are using the funds for the purchase of a first home or you are disabled or deceased". Roth IRA's are a great way to save for retirement; they may just save you from having to work your entire life. However, they may not be suited for all investors, but they are a good safe investment for those who aren't the most financially literate.The overall benefits of a Roth IRA are that which follows. They are not deductible and any withdrawal is free from federal income taxes. Roth IRA's also let you make contributions to it until you reach the age of 70½, which is not included in the traditional IRA. With a Roth IRA, there are no minimum required distributions. As opposed to a traditional IRA in which it requires minimum distributions usually starting on April 1 of the year after you reach 70½.A traditional IRA is another tax-advantaged way that can help you save money for your retirement. You may contribute up to $3,000 or 100% of earned income; whichever is less, to a traditional IRA every year. However, the amount of money you are able to put in is reduced when you make any other contributions to a Roth IRA within the same year.Some benefits of a traditional IRA are that, as seen at Atlanticfinancial.com, "Contributions may be tax-deductible, depending on your adjusted gross income (AGI) and whether you participate in a retirement plan at work. Your potential earnings from your investments can grow on a tax-deferred basis. If your investments increase in value, you won't pay taxes on those earnings until you withdraw them - typically at retirement. Tax-deferred compounding can enhance the growth potential of your money". However, in most early withdrawals from traditional IRA's there is a 10% penalty from the IRS on top of any income taxes that you may have. On the more positive side, there are some exceptions for an early withdrawal such as, when you are paying for a first home, seeking higher education, paying medical expenses, health insurance, have a disability or if the account owner dies.You don't have to choose one type of IRA over the other. You may have both a traditional IRA and a Roth IRA, contributing to either or both whenever you wish. You have read the benefits and downsides of them both, so now it's your turn to decide if this type of investment is right for you.

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