Tax Advantages of the Roth IRA

If you are opening an IRA account, you may be offered the option of opening a Roth IRA. Like a traditional IRA, a Roth IRA is designed as a savings account to invest in for your retirement. However, the tax rules applied to the Roth IRA are a bit different from those for a traditional IRA--and in some ways, are even better.

Differences between Traditional and Roth IRAs

With a traditional IRA, you can contribute up to $5,000 each year. You can also claim these contributions as a deduction on your annual income tax, reducing your taxable income each year. However, this means that the money you contribute to your IRA has not been taxed, so that means you will have to pay income tax on your IRA distributions after you retire.

With a Roth IRA, though, you cannot deduct your annual contributions on your income tax. But that means you've paid the tax on the income you deposit into your Roth IRA. This means, when you retire, the income you withdraw from your Roth IRA will be tax-free.

Choosing the Right IRA

The Roth IRA is best if you plan to stay in the same tax bracket when you retire and you want tax-free income once you retire.

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