How To Determine Which IRA Is Best For You
Starting an individual retirement account (IRA) is a great way to save for your golden years, but do you know how to determine which IRA is best for you? The two personal IRAs that can be opened at many brokerage firms, financial institutions and insurance companies are the traditional IRA and the Roth IRA. There are a number of differences between the two plans, and this information should be taken into consideration when choosing the right IRA for you.
- When will you be taxed on the individual retirement account contributions? The biggest difference between the two plans is the taxation factor. One provides tax-free money on the front-end and the other offers tax-free money on the back-end. The traditional IRA contributions are tax deferred and tax deductible during the year of the contribution. You will pay ordinary income taxes on the funds when they are withdrawn at retirement. Money put into the Roth IRA comes from income that has already been taxed. The money grows tax-free and all withdrawals are tax-free as well, provided you meet specific requirements.
- Is there a specific age at which you are required to take distributions? The traditional IRA requires you to start distributions at age 70 1/2, and the Roth IRA does not have a required distribution age. Both plans allow withdrawals to start at the age of 59 1/2, but the Roth IRA must have been open for at least five years prior to this minimum age.
- Are there income limits or contribution limits? There are income limits with the Roth IRA. Currently, the income limit is $95,000 for individuals and $150,000 for a married couple. There are no income limits with the traditional IRA. The total contributions to an IRA are also limited with both plans. Currently, there is a $5,000 maximum contribution, although there are exceptions to this rule. Please note that the limitations are subject to change at any time by the government.
Contact a tax advisor or financial planner before opening an individual retirement account. He can provide you with expert advice based on your specific financial situation and retirement goals. He will also be able to explain the fine print of the terms and agreements that you will be required to understand and sign when opening an individual retirement account.