The two types of IRA’S are Traditional IRA’s and Roth IRA’s. In short the difference is, Roth IRA’s are taxed on the seed and Traditional IRA’s are taxed on the tree. So with a Roth you pay taxes on the money you contribute (seed), and with a Traditional you’re taxed on the benefit (tree) when you collect it. Easy right? Now lets get into the nitty gritty of both IRA’s so we can decide which one is best for are own specific needs.
Will start with Traditional IRA’s, after all they came first, “Ready”? Ok great, let’s begin. Traditional IRA’S which as we just learned are taxed upon cashing it out. One can contribute five thousand dollars a year (same as 2009) if there under the age of fifty. If you’re over the age of sixty you can contribute six thousand dollars a year. You can own both at once however you can’t exceed the limits of combined contributions to both IRA’s. The premiums can be written off but the amount you write off is determined by your yearly income. Starting at fifty five thousand dollars a year, you will not be able to deduct as much of the premium off as you could if you made less. If you make sixty five thousand a year or more you will not be able to deduct the premiums off on you’re taxes. If your married and filing jointly the range is eighty nine thousand a year and one hundred and nine thousand a year. The earliest any IRA can be cashed in penalty free is fifty nine and a half. Otherwise it’s a ten percent penalty for early withdrawal. You also must cash it in by age seventy and a half. With a Roth IRA you don’t have to cash it in at age seventy and a half. A traditional IRA can be rolled into a Roth IRA penalty and tax free.
Roth IRA’s where created in 1997 by the tax payer relief act. The Roth’s premiums cannot be deducted because you’re using pre taxed dollars. The upside is that the benefit is not taxed and you don’t have to collect it at seventy and a half. Taxes are the variable in all IRA’s. I’m of the opinion that it’s better to be taxed on a little bit of money (premium) than a large amount (benefit). Everyone’s needs are different so there’s no right or wrong product. When comparing the two IRA’s and deciding what’s right for you, ask yourself these questions. What tax benefit am I in now, and what tax benefit do I think I’ll be in at the age of fifty nine and a half? The unknown variable is how much will taxes be at the time I want to collect? No one can predict that, but we can predict earnings. Generally a traditional IRA will earn more than a Roth over time. This is because all the premium of the traditional IRA is going towards the investment, while with a Roth part of the premium is going to be taxed. However you will be taxed on the entire amount of the traditional IRA and not the Roth. Not knowing what the taxes will be and what tax bracket you’ll be in the future is what’s keeping you from knowing for certain which one will make you the most money. I hope this article provided you with enough information to compare and buy a IRA. The future is right around the corner so plan and invest for it so you’ll be financially comfortable.