Understanding the Differences Between Roth IRAs and Traditional IRAs
When you’re looking for the best way to invest your money, you will have to decide between Roth IRAs and a traditional IRA. Social Security isn’t a given like it was in the past; IRAs allow you to save for retirement, and with more and more companies no longer offering pension plans it’s your responsibility to start saving for yourself. Here I’ll show you how you can choose between the two.
Roth IRAs allow you to avoid taxation of your retirement savings:
- Since you fund this account with your earnings for the year, you’ve already been taxed for those earnings out of your paycheck.
- Even with contributions of a short period of the maximum amount ($5,000 each year) you can create padding for your retirement that will be significant!
- Pull out your money any time you need to, you aren’t capped at only pulling out the money you’ve put in at certain times of the year; you also won’t have to pay an early withdrawal penalty to the IRS for pulling your money out early.
- You can choose how you use your account, and you don’t have to use the money if you don’t want to. You can leave it to others in your family or friends after you’re gone, or keep saving money in it until you’re 90 years old and start pulling money out.
IRAs allow you to save for retirement, but you pay taxes when you withdraw it:
- It’s a definite uncertainty how much you’ll pay in taxes in the future on your IRA, so if you do well in the future you may end up paying even more and losing money on your investment.
- You don’t have control of when you start pulling your money out of your IRA, you have to start taking it out at the legal retirement age.
- Not all IRAs are created equal; not all contributions to a traditional IRA are tax deductible so you may not get any savings on your account.
When you’re looking at how to invest in your retirement the choice is simple: Roth IRAs. Take control over your money and start saving for the future. Why should you sacrifice your future to avoid paying a little bit in taxes now, when taxes are sure to rise in the future? In the end, investing in your future is your responsibility, and Roth IRAs give you the security you need in an insecure world.