Anyone looking to save money for their retirement should consider investing in an individual retirement account (IRA). there are 2 types of IRAs, a Traditional IRA and Roth IRA. IRAs provide you with the opportunity to select different stocks, bonds, CDs (certificates of deposits) and other investments you want to participate in.

Traditional IRA
The contributions you make to a traditional IRA account are tax-deductible up until the time at which you withdraw the funds. Once you reach the age of 59 ½ you are eligible to withdraw from your traditional IRA, but you will need to pay the tax on withdrawing the funds and you will also need to pay a 10% penalty. this can be a crushing blow to someone that was hoping the money was 100% tax free. The nice option you have with a traditional IRA is the ability to purchase a variety of different investment likes stocks, bonds, and CDs. since it is hard to predict what the future will look like and you think your tax rate will be lower when you retire, a traditional IRA may be a great retirement investment strategy for you.

Roth IRA
When you contribute to a Roth IRA account, you are responsible for paying the tax on those contributions. Once you reach the age of 59 ½ you are no longer responsible for federal tax and you can withdraw this money at any time without paying a penalty. most investors will agree that Roth IRA’s are the smarter investment of the 2 because you can get the money tax-free when you retire. since you don’t know what the tax brackets will look like when you do retire, it is a wise decision to pay now so you can profit later. Like the Traditional IRA, the funds in the Roth IRA can be used to invest in stocks, bonds, and CDs. A Roth IRA is only available for single-filers that make up to $95,000 or a married couple that makes a combined income of $150,000 annually. You also have the ability to withdraw your principal contributions without penalties.

Which one should I choose?
When it comes to deciding on which IRA plan is right for you, take a look at the way you are currently taxed. Let’s say you make around $50,000 a year and you place around $2,500 into a traditional IRA, you can deduct the $2,500 from your taxes this year. So your taxes would be $47,500. Once you can start pulling money out of your IRA, you will need to re-pay all the money in capital gains, interest, and dividends. Now if you choose to invest in a Roth IRA the $2,500 you invested into your IRA are still subject to your income taxes. since you are paying the tax now, you don’t need to pay it when you are eligible to pull the money out of your account. most people prefer the Roth IRAs, but some people do not qualify for them because they make too much money and there are some limitations on a Roth IRA.

Always follow the rules of your IRA to avoid paying the withdraw fees and other penalties that are included with your IRA.

Traditional IRAs and Roth IRAs and your retirement: Personal Finances