If you are trying to decide what kind of individual retirement account (IRA) would be best for you, but don't know where to start, you're not alone. The two most commonly used IRA's are called Traditional and Roth IRAs and they each have their own pros and cons based on your personal situation. There are several ways to take stock of your retirement goals and current professional circumstances and pick a retirement plan that will set you up for success.
A Roth IRA is named for William Roth, a former U.S. Senator. This type of retirement account gives users the ability to make tax-free withdrawals, provided that certain qualifications are met. It is important to know that you pay taxes on the money as it is deposited into the account. This allows you to withdraw money from your account in retirement without having to worry about taxes then.
A Roth IRA account would not be an ideal choice for individuals who make more than $140,000. There is also a limit for married people who make more than $208,000/yr (as of 2021). However, if you make less than that predetermined amount, this type of account is perfect if you expect your taxes* to be higher when retirement rolls around.
In 2021, contributions are capped at $6000 a year. This limit does not apply to those who are over 50 years old. In this case, the contribution limit is raised to $7000. It is important to note that there are no tax benefits for contributing to a Roth IRA. This retirement account has no required minimum distributions which means that you can take money out whenever you want, or not at all.
In a traditional retirement account, users are able to make contributions without paying taxes on the money at the time that they put it into the account. This is already a clear difference between a traditional and Roth IRA. Keep in mind that, though you would be receiving a tax break in the short term, you will be required to pay taxes on the money at the time of withdrawal.
Similar contribution limits exist as with a Roth IRA. The cap is $6,000 for those younger than 50 years old and $7,000 for those over 50. Many people are immediately attracted to traditional IRAs because they have the potential to reduce your taxable income, but they only make sense for people who are not concerned about paying taxes during their retirement years.
In addition, a traditional IRA would be good for individuals who have a yearly income larger than $140,000. Anyone can contribute to a traditional IRA, regardless of income. The lack of income-eligibility restrictions is an attractive benefit for many.
It can be difficult to pick between a Roth IRA and a traditional one, but professionals are available to help you evaluate your options and weigh the benefits against the disadvantages. Factor in account distribution and withdrawal requirements, income limits, and possible tax credits. Looking at the IRS rules on IRA eligibility can be a good place to get started.
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*Consult your financial advisors and appropriate government agencies for any effect on taxes or government benefits