Deciding to invest in a Roth account is simple but making the decision of investing in the traditional or Roth IRA is the tougher part of the decision making, to make the decision one needs to consider the difference between Roth and traditional IRA and make the choice considering the individual requirements and also get an overview of the benefits and drawbacks of two major types of retirement plans, and who might benefit from each type of plan.
Roth IRAs
The money you put into a Roth IRA is taxed on present tax rate and the amount contributed in the Rothaccount is not deducted from the taxable income amount, hence there is no worry about paying taxes when amount is withdrawn. This means that the investment will grow tax-free. Another thing is that the owner falls in a low tax bracket now compared to the rate of tax at retirement.Another benefit of Roth IRAs is that the owner can withdraw the contributions at any time without penalty, irrespective of the age. Not just the income from the Roth account like the interestearned, but the principal amount contributed can also be withdrawn.
But putting the money into the Roth IRA taxed now means paying more taxes now thanwould have been done with a Traditional IRA. Besides that, the owner can only contribute to a Roth if the income make under a certain amount. These limits change every year and for the year 2011, that amount is $107,000 for singlefillers and $169,000 for married fillers. In a Roth IRA there is also a contribution limit for those under 50 years old, that limit is $5,000 and for those over 50, the amount is $6,000.
Traditional IRAs
The money that the owners contribute is tax deductible now, so the owners get a tax break by depositing money. This is great for owner with limited income and tight on money now but expects to have more lately in life. Along with this there’s no income limit for contributing to a Traditional IRA, so this is a good option for those who make over the contribution limits or for those who don’t qualify for a Roth IRA.
But in a traditional Ira the money is taxed when withdrawn, which means that the owners pay taxes on the earnings as well as the initial amount or principal amount contributed to the account and the owner generally end up paying more.
The major difference between the Roth and traditional IRA it that the owner of a Roth IRA can withdraw the money before the qualifying age that is 59 and a half without a penalty. The early withdrawal charge a 10% penalty but in some circumstances these penalties can be avoided, such as disability or using the money to pay some medical expenses, for payment of first home, college education fees etc.