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Should I Get a Roth IRA or a Traditional IRA? Tips on How to Decide

Opening an IRA(Individual Retirement Account) is agreeably a smart way to put aside some money towards your retirement. Of the three main types of IRA’s, the two most popular are the Traditional IRA and Roth IRA. They have different features and offer different advantages as well. Opening any one of these accounts is not difficult. We can establish self-directed IRA’s with checkbook control in approximately two weeks.

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Whichever option you find right for you, you will have a variety of investment options from which to choose including CDs, mutual funds, Real Estate, precious metals, tax liens etc. If an individual is unable to contribute to the employer-sponsored 401(k) plan, IRA is always a great alternative. It is also a good “top up” for those who do contribute to a 401k plan.

Roth and Traditional IRAs have varying advantages and benefits, but before deciding on the right option for you, here are some tips that you should consider.

Roth and Traditional IRA benefits and taxes

Taxing for both accounts is timed differently. If your income and filing status are within the IRS limits, a Traditional IRA can allow you to make tax deductions on your contributions. Simply put, your taxes are deferred until you take distributions later in life.

A Roth IRA on the other hand offers tax benefits later because the money you put in this account will already have been taxed. If IRS guidelines are met, your contributions and their earnings that have grown over the years will be available at retirement tax-free. The Traditional IRA shelter all your dividends, interest and capital gains from taxes until the time you make withdrawals. The Roth IRA will do the same but the deferral changes to tax-free when the IRA owner reaches 59 ½.

Roth and Traditional IRA eligibility

Eligibility to contribute to either a Traditional or a Roth account is based on your taxable income and is subject to IRS limits. It is also possible to make your contributions on the basis of your spouse’s income. You will be eligible for a Traditional IRA if your income allows your contributions to be deducted.

With a Roth IRA, your income will dictate how able you are to even make that contribution. Roth IRA contributions are not allowed if your filing status shows that you have a very high household income.

Combined contribution to both the Traditional and Roth is capped at $5,500 if you are below 50 years and $6,500 if you are 50 and above.

Roth and Traditional IRA withdrawals

If you have a traditional IRA and wish to make a withdrawal before the age of 59½ years, you will pay income taxes and a 10% penalty, though there are some exceptions.

Roth IRA contributions may be withdrawn at anytime without penalties or taxes for a qualified distribution. It is worth noting that any earnings on a Roth contribution are subject to taxes and penalties if withdrawn before attainment of 59½ years.

So what’s the best option?

It makes sense for younger people to consider Roth contributions. They have more time for the Roth to grow and counteract the taxes already paid for the Roth contribution. As you grow older, you should have a tax professional “do the math” and see if a Roth contribution is best. For people who might never want to touch their savings, Roth contributions and/or Roth conversions might make sense because their heirs will never pay tax on the inherited IRA’s.

It is difficult for one to predict with certainty what their financial status will look like at retirement. This is one more reason why you should consider using both the Traditional and Roth account types in your retirement saving plans in order to maximize the benefits.