Did you know that only seventeen percent of Americans consider saving for retirement a top priority? While many people are just focused on paying their rent, many others simply don’t think it’s that important to plan for the future.
As you start to enter the business world, you’ll likely start hearing terms like traditional and Roth IRA being thrown around. It’s important that you don’t ignore these terms and instead try to see how they can benefit you.
In this article, we’ll walk you through the Roth vs traditional IRA and help you decide which is best for you.
What Is a Traditional IRA?
An IRA is an individual retirement account. And the main difference between a traditional IRA and a Roth IRA is the tax implications.
With a Traditional IRA, your contributions are tax-deductible on both federal and state tax returns for the year that you make your contribution. This means that when you withdraw your money from your traditional IRA, you’ll have to pay taxes on that money at your income tax rate.
When you add money to your traditional IRA, you’ll lower your taxable income in the contribution year. This will help you qualify for tax incentives.
What Is a Roth IRA?
The Roth IRA is becoming more and more popular among young adults. With a Roth IRA, you pay taxes on the contribution instead of the withdrawal. With this vehicle, you won’t get a tax deduction when you make a contribution.
However, what’s so powerful about the Roth IRA is that you can withdraw your earnings without paying any taxes.
Each year, you can contribute up to $6,000 to your Roth IRA. That means that you could contribute up to $180,000 over the next thirty years. If your investments do well, you could end up profiting hundreds of thousands or even millions of dollars and only paying taxes on that first $180,000.
Generally, it is recommended that you use a Roth IRA if you feel that your current tax rate is lower now than when you intend to start withdrawing money. If you’re currently making a lot of money and intend to wind down in the near future, you might want to use a traditional IRA and make use of those tax advantages.
And if you’re worried that you missed out on the benefits of the Roth IRA, you can click for more to learn about backdoor Roth IRA contributions.
It should also be noted that you’re only taxed when you withdraw money from your account, not when you make trades within the account.
The Importance of Knowing Roth vs Traditional IRA
Hopefully, after reading the above article, you’re now excited to start investing for your retirement. By knowing the differences between Roth vs traditional IRA, you’ll be able to make better and smarter decisions when it comes to your finances.
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