Roth IRA vs Traditional IRA

Roth IRA vs traditional IRA is a decision that many people are going to have to make at some point in their lives. As you begin to invest for you retirement, these types of vehicles are among the best that you'll find for giving yourself the ability to increase the amount of money that you have available to you during your retirement years, while allowing that money to grow with significant tax breaks. There are certainly other types of savings options when it comes toward preparing for your long term future, but making the decision of Roth IRA vs traditional IRA will be a primary consideration.

Considering Roth Account Strengths

The first factor to consider when you're saving for the time when you'll be relaxing and no longer bringing in a paycheck is the type of tax breaks that you'll want to use. One of the reasons that people select a Roth option in the Roth IRA vs traditional IRA debate is that this type of savings option is good for providing a break on your income taxes on the amount of money that grows in your investment account. With a Roth, you won't receive a tax break on the initial investment money that you deposit into your account that's aimed at funding your retired years.

Although this might not seem like a great benefit in the Roth IRA vs traditional IRA consideration, this type of tax treatment of the money in a Roth account is going to give you benefits on your income taxes far down the road. The rules for this type of account mean that the money will grow at a tax free status, so that you don't have to pay taxes on the money when you withdraw it from the account. That is the primary strength of this type of account, as you don't have to worry about paying large amounts of income taxes in your years when you're retired.

Looking at Traditional Options

There are quite a few other considerations you must make in the Roth IRA vs traditional IRA comparison. For example, when looking at a traditional account option to help you fund your long term future, there are some advantages that you can't find with other types of accounts. When you choose to go with a traditional account in the Roth IRA vs traditional IRA debate, you're going to be able to make an income tax deduction on the money that you deposit in the traditional IRA account at the time you make the deposit. So, if you deposit $3,000 this year, you can receive a deduction on this year's income taxes.

Some people may decide that having this type of tax deduction now is a significant benefit to their financial situation, which is why they choose to go in that direction with the Roth IRA vs traditional IRA choice. Under this scenario, however, the person who owns the traditional account then must pay their regular income tax rate on the money that they withdraw from the account once they reach the age of retirement. In some instances, because you'll probably be moving into a lower tax bracket at the time you've decided to retire, this can be advantageous.

Comparing the Retirement Choices

One other piece of advice when it comes to a traditional IRA is that you will have to begin making withdrawals by the age of 70 1/2. You cannot just leave the money in this type of account to grow indefinitely. It requires that you make regular withdrawals within a certain amount of time. This is a different rule than you'll find with a Roth option, which doesn't force you to begin making withdrawals by the time you reach a certain age. Allowing the money to continue to grow may be an advantage for you, especially if you have other types of accounts that you want to access first.

You also should understand that in the Roth IRA vs traditional IRA consideration, the Roth account has income limitations applied to it. You can only have an adjusted gross income of less than the amount that the IRS regulations specify to make a deposit to your account during the tax year. This number changes from time to time, so you should consult IRS documentation to see what the exact number will be for the upcoming tax season.

After considering everything, the ultimate decision in the Roth IRA vs traditional IRA debate is determining whether you want the tax free earnings of the former type of account against the tax deferred benefits of the latter. Each person's financial situation is different, meaning that it's difficult to find one solution that will work for everyone. Do a little homework to pick the best option for you.

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