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Roth vs. Traditional IRA

Updated on August 31, 2011

Roth vs. Traditional IRA - Which is Better?

If you are not familiar with the differences between the Traditional IRA and a Roth IRA, you’ll have a hard time figuring out where you will invest your funds in preparation of your retirement. Though, many people have their own perception which of the two is better, you must recognize that these two kinds of retirement investing plans target dissimilar objectives. So, if you would like to review Roth vs. Traditional IRA, you must study their features accordingly, so you can choose, which one best fits your needs.

On tax implications, the contributions made on Roth IRAs are post tax money. Under certain stipulations granted by the law, there are no taxes a contributor shall pay when normal withdrawals or distributions are carried out. For Traditional IRAs, the contributions are initially set as post tax money. Still, the contributed money are tax-deductible that lessens your tax basis for that particular tax year. Traditional IRAs’ withdrawals incur tax and tax deductibility is restricted by the Modified Annual Gross Income (MAGI) and contribution in 401(k) or pension.

Roth vs. Traditional IRA Comparison

When comparing between Roth vs. Traditional IRA, you should properly look at all the factors that will affect your retirement planning. You must check the income limits and contribution limits of these IRAs. When it comes to distributions, you can withdraw your funds starting at the age of 59 ½ or when the distributor becomes bedridden or disabled. For the Roth IRA limitations, withdrawals can begin when you reach the age of 59 ½, your account should be at least five years opened or if the account holder becomes disabled.

Roth IRA has no forced distributions while Traditional IRAs delineate forced distributions that can start at the age of 70 ½ with a penalty of 50 percent on the minimum withdrawal. Traditional IRA does not allow contribution withdrawal, but Roth IRA may allow you to withdraw the total contribution on your IRA at any point of time. For early withdrawals, Traditional IRA will grant you 10 percent penalty and additional taxes if you make distributions before you turn the age of 59 ½ with some exceptions as stipulated by the rules. For Roth IRA, early withdrawals that are made more than your contributions to include seasoned conversions will incur normal income taxes and 10 percent penalty for non-eligible withdrawals.

If you want to buy a house using your Roth IRA, you can withdraw up to $10,000 as your chief down payment, only if you didn’t own a home for the last 24 months. The house you will acquire should be named after you as the account holder or should be titled under the name your direct descendants. Traditional IRA on the other hand, allow you to make distributions up to $10,000 for your first time purchase of home under specific stipulations.

Traditional IRA vs Roth IRA

Learning more about IRAs

Learning about the Roth vs. Traditional IRA will also let you understand about some components that the two IRAs are the same. Both IRAs allow you to withdraw money for expenditures of higher education for you, your children and grandchildren. They also permit you to make withdrawals for medical expenses of more than 7.5 percent of your AGI.

When choosing between Roth IRA and Traditional IRA, it would be best if you already set your requirements that will make it easier for you to decide what retirement plan is the most effective for your financial stability in the future. You can also decide between an IRA vs Self-Directed IRA.

If you are ready to start your IRA, learn how to open a Roth IRA.


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