December 30, 2014 Admin | December 30, 2014 What is the difference between a traditional vs. a Roth IRA? Where to start one? Why? Who? How?
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With a traditional IRA you pay the taxes when you take the money out. With the Roth IRA you pay the taxes when you put the money in. You can start an Ira at any large financial institution, including banks. You should start one as soon as possible so you money can grow as long as possible. As to which one is right for you, it depends on your specific circumstances and preferences.
In addition to the tax differences, you can withdrawal all of your contributions to a Roth at anytime with no penalty. There are also special circumstances that allow you to withdrawl capital gains before the age 59.5 with no penalty. While 59.5 is also the earliest you can withdrawal from a Traditional (with no penalty) you are required to take a minimum distribution (calculated using your life expectancy) by April 1 of the year after you turn 70.5. There is no such requirement for a Roth IRA.
A traditional Roth has money that has been tax deferred in it that still needs to be paid. The principal and gains of the traditional will have to be paid as taxable income when it is removed. The Roth has money that has been taxed already in it. The gains and principle in the Roth will not have to pay paid in taxes latter if you follow the rules for the Roth.
Great answers, gentlemen. Let’s review.
1. Traditional IRA money goes in before taxes and can reduce your yearly federal and state income taxes.
2. Roth IRA money goes in after it has been taxed. It reduces your taxes years down the road when you pull the money out.
3. In most cases today, the Roth IRA is the better option. The max contribution is $5,500 for people under age 50 and $6,500 for folks 50 and older. This applies to tax years 2014 and 2015.
4. You can start a Roth IRA with as little as $1,000 at Vanguard.com as you open up a Target Retirement Fund that fits your time horizon (2030 for example).
5. Why? You know the future is coming and you want to be ready for it. Awake to the possibilities!