What’s the difference between a Roth IRA and Traditional IRAs and which one is best for you?

If you just got a full-time job, or have been working for many years, it is important to think about your retirement. Statistics say that the average person will retire at the age of 66 and will live until around 79. On top of that, nearly 55% of Americans retire earlier than expected due to certain circumstances such as health, family, and stress. Furthermore, only around 6 in 10 Americans are saving for their retirement. Since retiring is something that everyone hopes to do one day, you should begin retirement planning as soon as you start working. When thinking about retirement, there are a few different terms that get used quite often. Some of the most common are Roth IRA and Traditional IRA.

Before understanding what the terms Roth IRA and Traditional IRA, you must first understand what IRA stands for. IRA stands for Individual Retirement Account. This means you place money into an account, and it is invested into stocks, bonds, mutual funds, or CD’s to give you a higher return on your deposited money. That being said, there are multiple forms of individual retirement accounts (IRA) and the most common are Roth IRAs and Traditional IRAs. Listed below are detailed descriptions of what a Roth IRA consists of and what a Traditional IRA consists of.

Traditional IRA

A Traditional IRA is simpler than some people realize. Nearly all types of financial institutions offer Traditional IRAs which include banks and credit unions, investments accounts, brokers, and mutual fund companies. The way you contribute money to your Traditional IRA is through your income. You determine a certain amount of your paycheck that you would like to have deposited into your Traditional IRA, and it will be placed into that account instead of in your paycheck.

One of the most important items to note about the Traditional IRA is that the amount that is being withheld from your paycheck, is tax-exempt. Whenever you get a paycheck, the government takes a large portion of it in taxes. When you choose to have money placed into your Traditional IRA, the government won’t tax this portion of your paycheck or income. You don’t end up paying taxes on it until you go to pull the money out of your Traditional IRA.

Roth IRA

A Roth IRA is quite similar to the Traditional IRA. Similarly, most financial institutions will offer them, and you can contribute a portion of your paycheck into it. The main difference is that in a Roth IRA, the money you contribute is taxed on the front end. This means that funds are being taxed just like the rest of your paycheck. Then when it comes time to begin drawing money out of your Roth IRA, the account will not be taxed. In essence, that is the main difference between the two. The Roth IRA has taxes initially as you put the money in, and the Traditional IRA does not get taxed until you are drawing money out.

Which Is Better?

Now that you know the differences between the two, you might be asking yourself which type of IRA is best? The type of IRA that is best for you depends on your tax preferences. If you believe that inflation and tax rates will remain low during the course of your lifetime, a Traditional IRA might be best. If you are concerned that tax rates may go up before you retire, contributing to a Roth IRA might be the best option since the taxes are taken out immediately instead of in the future. Additionally, Roth IRAs are more flexible with early withdrawals. A Traditional IRA is more strict and has higher penalties if you withdraw your money before age 59.5.

Anyone is eligible for a Traditional IRA, but the tax-deductible is based on your income and your employer. For a Roth IRA, your modified adjusted gross income must be less than $137,000 if you are single. Less than $203,000 if you are married in order to contribute.

If you are considering opening an IRA, be sure to think about the differences between the two. Be sure to know what your financial circumstances are. If you live in the SouthEast Texas area, consider visiting Eastex Credit Union. Eastex is a SouthEast Texas-based Credit Union. They can help you open Roth IRAs Texas or Traditional IRAs. Retirement savings is something that you need to consider if you haven’t already done so. Stop by Eastex today to open your Roth IRA or Traditional IRA, or just simply come by to learn more. And learn how to best prepare for your retirement savings.

Comments are closed.