Roth IRAs and Standard IRAs Compared

Both Roth IRAs and standard IRAs offer you some advantages as an investor. If you need to start saving for retirement, one of these accounts can help you begin your retirement savings. However, choosing between the two types of accounts can be difficult. Here are a few things to consider about Roth IRAs and standard IRAs.

Standard IRA

The term IRA stands for individual retirement account. With a standard IRA, you are allowed to contribute pretax money to an investment account. This investment account can be held with a number of brokers, which are referred to as custodians. The money can be deducted directly from your paycheck before you pay taxes on it. Once the money is in the account, it can be invested in a number of different investments. The returns that you earn from investing are allowed to grow tax-free in the account. Once you reach the age of 59 1/2, you can begin to withdraw the money in the account. At that time, you will pay taxes on money that you take out.

If you take out anything before retirement age, you will have to pay a 10% early withdrawal penalty and pay income taxes on the money you removed from your account. You can contribute as much as $5000 per year to this account. Once you reach the age of 50, you can contribute $6000 per year. There are no income requirements on this type of account, therefore anyone can get involved if they want.

Roth IRA

The Roth IRA is a different type of account that allows you to save for retirement. With this type of account, it is designed to help you get the taxes out of the way first. You fund the account with money that you have already paid taxes on. Once the money is in the account, you can invest it and the returns are tax-free. When you reach the age of 59 1/2, you can withdraw the money without having any tax liability. 

With this type of account, you can withdraw the principal at anytime. Therefore, you can get back the money that you put into the account easily. However, if you withdraw the earnings from investments, you will pay a 10% penalty on that amount.

With the Roth IRA, there are income restrictions that prevent certain people from contributing. If you are single, you have to make less than $95,000 per year in order to contribute the full $5000. If you make between $95,000 and $120,000, you can contribute a partial amount to your account. As a couple, you have to make below $167,000 to be able to contribute fully. Married couples who earn between $167,000 and $176,000 can only make partial contributions.

Choosing An Account

As an investor, you have to decide whether you want to pay your taxes now or later. In many cases, the Roth IRA makes a lot of sense because your tax bracket will be lower when you are younger. If you successfully invest your money, you could potentially make as much as you want on returns and it is considered free money. Weigh all the factors involved and choose the account that is best for your needs.

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