Deciding to invest in a retirement plan is the first and most important step to financial freedom. Now that you have decided to start saving for your retirement, choosing the best option becomes easier. There are many considerations for you to look into and come up with the one single best option for you. Saving for retirement is an important financial aspect of your present, which will help in securing your future. Hence it is all the more important to gather as much data as possible and spend some time researching before you decide on a plan.
Traditional vs. Roth IRAs
IRAs are one of the most convenient vehicles when it comes to saving for retirement (Click here for more on what IRAs are all about). There are two types of IRAs, traditional and Roth IRAs. When you have to decide between traditional IRA and Roth IRA for your investments for retirement, a lot depends on how far away you are from retirement and what will be the possible economic climate in the future. Both types are great options for savings, each with its advantages and limitations. Knowing both plans will help you in choosing the right plan to meet your needs ensuring a good retired life no matter what the economic scenario is in the years to come.
One of the most confusing parameters is the tax deferred vs. tax-free. In traditional IRA, the tax is deferred. This means that the contribution you make towards the traditional IRA account is not counted as your income and is exempted from taxes. However, contributions to Roth IRA are very much part of your income and you need to pay tax on the contributions as well. The net money you get when you retire depends a lot on the taxation policies. If you expect the taxes to be higher when you retire, it is best to invest in Roth IRA since withdrawals are not taxed. Even the earnings on Roth IRA account are not taxed and this is a great benefit. However, earnings, capital gains and principal amount is taxed when you start withdrawing from a traditional IRA account.
In a traditional IRA account, you can start withdrawing the savings when you reach an age of 59 years and six months. You need not make withdrawals until you reach an age of 70 years and 6 months, when withdrawals become mandatory. However, in Roth IRA account, there is not mandatory age for distributions. This option is beneficial for those who have enough money for their retirement through other sources and want to leave some money to their heirs.
The savings in both traditional and Roth IRA can be used to invest in other modes such as certificates of deposit, bonds or stocks, though there are some restrictions that apply to both he accounts. Record keeping is much easier for a Roth IRA account since there are no minimum withdrawals or tax on the withdrawals. The single biggest advantage of traditional IRA account is that it is open to any income level. Roth IRA has filters on and is open to only those who earn more than $95,000 or married couples earning more than $150,000 combined annually.
Roth IRA may seem a better option than traditional but it is not open for all. Instead of procrastinating opening an account, even if a traditional IRA account might seem inferior, it is best to start saving now for your retirement. Fulfilling your dreams after retirement largely depends on how you invest your money today.