In my previous post I discussed the difference between a Traditional IRA and a Roth IRA. In this post I’m going to talk about why you should choose a Roth IRA over a Traditional IRA.
What a Roth IRA?
A Roth IRA is a retirement account which allows you to put away $5,500 (after taxes) a year. While these contributions are not tax deductible, a Roth IRA will pay off when you actually do withdraw your money. You see, with a Roth IRA you are allowed to take out your money without paying any taxes! You will get away with paying a 0% tax rate in retirement. What’s better than that?
I want to withdraw money from my Roth IRA, will I face a penalty?
You are allowed to withdraw your contributions from a Roth IRA at any point and time without facing a penalty. Here it is important to differentiate between contributions and earnings. Say you put in $1,000 and earn $50 in interest in your Roth account. You are allowed to withdraw your original $1,000 without facing any penalty! Why is this so wonderful? With a Traditional IRA you are required to pay both taxes AND a 10% penalty if you withdraw ANY money from your account.
In addition, you may contribute to a Roth IRA if you also participate in a 401(k) plan from your employer. While you may also be allowed to contribute to a Traditional IRA, you lose the benefit of deducting a certain percentage of your contribution, depending on your income rate. See the chart for deductions in my previous blog post. With a Roth IRA, you do not have to give up the benefit of tax free withdraws just because you have a 401(k). In summary, if you have a 401(k), open up a Roth IRA to maximize the tax benefits.
Finally, a Roth IRA does not require distributions based on age. You see, when you have a Traditional IRA, you are required to make withdrawals at the age of 70 ½ years old. With a Roth IRA you do not have to make withdrawals. If you are old and have a ton of money stashed away, you are not required to take money out of your Roth. Why does this matter? You will be allowed to let your wealth continue to build TAX FREE after the age of 70 ½, which means your can leave more money to your beneficiaries.
What are you waiting for? Open a Roth IRA today!