Traditional IRA vs. Roth IRA

Many people face the issue of choosing between a Roth IRA and Traditional IRA. This is a huge decision with major financial implications. Both forms are great means to save for retirement-after decades of working on your career, it is definitely important to retire in comfort. They do offer different advantages, however.

With a Traditional IRA, contributions are tax deductible depending on your income level. Withdrawals start when you are 59 ½ years of age and are mandatory by 70 ½. Funds that are withdrawn before 59 ½ come with a 10 percent penalty. Taxes are paid on earnings. The funds can go toward the purchase of various types of investments, like bonds, stocks, certificates of deposits, and more. There are no income restrictions when it comes to the Traditional IRA; it is available to all.

A Roth IRA, however, is not available to everyone. It is only available to single-filers who make up to $95,000 and married couples that make $150,000 annually at most. Thus, it is dependent on career income. Further, the contributions are not tax deductible and a mandatory distribution age does not apply. The principal and earnings are completely tax free, as long as regulations are followed. The principal contributions can be withdrawn without penalty-some conditions apply. The funds from a Roth IRA can go toward the purchase of various forms of investments like bonds, stocks, certificates of deposits, and more.

If you have a career and your employer does not offer a retirement plan like the 401(k), a Traditional IRA will help you save pre-tax money for your retirement. As a rule of thumb, however, if you are more than ten years away from retirement, a Roth IRA is the better choice.