When looking to decide where to place money for retirement, if an individual is not seeking professional help there are certain alternatives that are present. Many times, the toss up between traditional and Roth IRA’s comes to the forefront of the decision. Much of the confusion comes from the lack of knowledge of each individual fund and what benefits each contain.
There is a certain number of limits regarding income according to age for each fund. For those who are younger than 70 years old, Roth IRA’s have eligibility income restrictions for $129,000 for a single tax filer. For married couples you must have less than $191,000 combined gross income level to be eligible to contribute to Roth IRA’s.
The tax benefits offered by both funds vary in time at which you are taxed. Traditional IRA contributions are tax deductible for state and federal filings during the year of the contribution but at the point of withdrawal they will be subject to regular tax rates. Roth IRA’s provide no tax deductions for the year of contribution but are tax free at the point of withdrawal. So you are either paying taxes on the way out of the the fund (traditional), or paying taxes on the way in (Roth).
The decision you should be making is whether or not the tax rate will be higher when you retire or when you contribute to the fund. That should be the indicator for you to base your decision on.
Withdrawals are also different for each fund. Traditional IRA’s mandate that minimum withdrawal be made by the time the owner reaches the age of 70 ½. Roth IRA’s do not need to be distributed to anyone beyond the lifetime of the owner. This IRA is optimal to pass along and transfer to next of kin.
Added Benefits and Eyebrow Raising Items:
Contributions over the year are tax deductible for that year’s filings. Lowering adjusted gross income. Up to $10,000 can be withdrawn without the normal 10% early penalty for qualified first time homeowners. These are taxable though.
Roth contributions, not earnings can be withdrawn at any time without penalty even before the age of 59 ½. For first time homeowners, after 5 tax years of contributions, you can withdraw up to $10,000 of Roth earnings if qualified.
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