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Tags: finance, ira, planning your retirement arrangement
 Even though you’re still young and working, planning your retirement arrangement is one of the more important things you can do to make your retirement years less stressful. One way you can assure that is by investing in an Individual Retirement Account. There are basically two types of IRAs—the traditional IRA and the Roth IRA.
To Roth or not to Roth? That is the question, isn’t it? Deciding on whether to go with the traditional or with a Roth IRA is a major decision that has potentially large financial consequences. Both forms of accounts are great ways to save for retirement, although each offers different advantages.
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A question you would need to answer first is whether you prefer to be taxed now or at a later date-one of the main differences between the two accounts. If you go with the traditional account your contributions are tax deductible, depending on your income, filing status, adjusted gross income, and eligibility to participate in a levy-qualified retirement plan through employment.
Since the contributions are made before being taxed it has the potential to lower your income bracket, and your money can grow without any levies until you withdraw it when you reach the age of 59½. When that happens it may then be taxed as ordinary income. As an example, if you made $40,000 and you contributed $2,000 to your IRA, you can deduct the contribution amount from your income tax.
Basically you will only be taxed on the remaining $38,000. The taxes will be deferred for the $2,000 contribution and will remain so until withdrawn. However, if you withdraw early you may have to pay not only the regular income tax but a 10% penalty as well. Also, traditional IRAs have a required minimum distributions clause which begins at age 70½ wherein it requires you make minimum withdrawals every year even if you don’t need the money.
A Roth IRA on the other hand is a tax exempt retirement instrument. Your contributions to a Roth IRA account is not tax deductible when you make them. Since the contributions are made on an after-tax basis your money can grow until you withdraw it when you reach the age of 59½ and when you do you don’t have to pay taxes on them.
Using the same example above, you will still pay taxes on the whole $40,000 income even if you contributed $2,000 to the Roth IRA account. Like in the traditional account, the withdrawal age is still set at 59½ with the added caveat that the account should have been active at least 5 years.
You can withdraw the principle amount only without penalty, but the rest should stay in the Roth IRA else they get taxed and penalties accrue. There are income limits set for being able to contribute into a Roth IRA account. For single filers if you make up to $101,000 you qualify for a full contribution; if it’s between $101,000-$116,000 you are only eligible for a partial contribution; and if over $116,000 you can’t contribute at all.
For joint filers if you make up to $159,000 then you qualify for a full contribution; if it’s between $159,000-$169,000 you are only eligible for a partial contribution; if over $169,000 you can’t contribute at all. And if married filing separately, $0 to qualify for a full contribution; between $0-$10,000 to be eligible for partial contributions and if over $10,000 no contribution is allowed.
Investing in either retirement account is a great way to diversify your taxes in retirement years. Decide on your personal situation and invest in whichever plan you decide is best for you. If you can do both then you can take advantage of the tax benefits now and when you retire.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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