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Roth IRA or Traditional IRA???
By admin | June 16, 2008
I have been getting quite a few questions on retirement recently and a lot of it is geared around Roth IRA’s vs Traditional IRA’sThe Difference:
Traditional IRA
- Tax deductible contributions (invest before taxes taken out of paycheck).
- Taxes are paid on earnings (capital gains) when withdrawn.
- Available to everyone with no-income restrictions.
- Able to withdraw at 59 1/2. All money withdrawn before this age is subject to 10% penalty.
Roth IRA
- Contributions are not tax deductible (invest with money that was already taxed; i.e. from paycheck) .
- All earnings grow tax free (no taxes paid when you withdraw the money).
- Not available to everyone (income restrictions: single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually).
- Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
Tax Deferred vs. Tax Free
The U.S. Government treats these two IRA’s differently. With the traditional IRA if you make $50,000 for the year and invest $2,000 in your traditional IRA then on your tax return you will only be taxed on $48,000 of your income. At age 59 1/2 when you start taking money out you will pay taxes on your gain on investment (capital gains).
Now if you invested $2,000 in your Roth IRA nothing changes on your tax return and you have to pay taxes on all $50,000 of income. However, when you start withdrawing money from your Roth IRA you will not have to pay any taxes on your gain on investment (capital gains). 100% tax free!
In most cases the Roth IRA will end up coming out ahead when you run the numbers, but everyone does not qualify for a Roth IRA. A person filing their taxes as single can not make over $95,000. Married couples have maximum income of $150,000 yearly.
How do I start an IRA?
Both types of these IRA’s can be opened through a brokerage house (Vanguard, Charles Schwab, etc.) or through a bank. Make sure you look at investments that have a long track record of success. If the fund hasn’t been around for more than 5 years there is not enough information on it yet.
Is there a minimum/maximum amount of money I need to invest?
Minimum opening fees differ by institution; the maximum this year is $5,000/year starting in 2008. In 2007 the maximum was $4,000/year.
Topics: Investments |