Traditional IRA vs. 2 Alternative Retirement Investments

There are a number of retirement investments available, the most common retirement investments are traditional IRAs, however, it may not be the best option for you. Each plan has its own unique advantages and drawbacks. Here are the basics of a traditional IRA and a few other popular alternatives.

1. Traditional IRA

The traditional IRA is one of the most commonly known retirement accounts available. With a traditional IRA, you can set aside tax-deductible contributions up to a maximum of $5000 per year. This money can be invested into many different investments. The return that you receive accumulates, tax free. When you reach the age of 59 1/2, you can start taking withdrawals from the account. At that time, you are taxed on the money as you take it out. The big advantages of this type of account is that you have investment flexibility and you get to defer money tax-free into the account. Here are a few alternative investments to the IRA.

2. Roth IRA

One variation of the IRA is the Roth IRA. The Roth IRA has been growing in popularity ever since it was introduced. With a Roth IRA, you make contributions to the plan with after-tax money. You can then use the money to make investments just like you can with a regular IRA. Then when you reach 59 1/2, you can start taking money out. The big difference here is that you do not have to pay any tax on the money that you take out. This means that all of the money that you made from the investments is tax free. In addition, you may have been in a lower tax bracket when you started contributing. This allows you to save some substantial money in this way. 

3. 401k

Another popular alternative to an IRA is the 401k. With a 401k, you are going to have to go through an employer to invest and with the 401k, you can make tax-deductible contributions to your account directly from your paycheck. The money can grow tax free in the account in the same manner as an IRA. However, one big advantage with this type of account is that your employer will typically make contributions to the account. Many of them will match your investment up to a certain percentage. For example, your employer might make a 50% match up to 8% of your income. This means that if you save 8% of your paycheck, the employer will then put in another 4% at the end of the year. This means that you just got a 50% return on your investment before you even start investing. 

Another advantage of the 401k over an IRA is that you can contribute more money per year. You can now contribute as much as $16,500 per year, versus only $5000 with an IRA. This allows you to build your nest egg faster.

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