Choosing Between a Traditional and Roth IRA

Whenever a conversation turns to money or investing, one of my friends always jokes that he can afford to “retire at 80, but only if [he dies] within a year.” While I’m fairly sure he’s joking, how to fund retirement and plan for a financially secure future are subjects worth some serious thought. Since I honestly don’t anticipate ever receiving social security benefits, I’ve found other ways to set aside money for what I hope will be my golden years.

Like many people, I invest in a 401k up to the maximum amount my employer will fully match; after that, I stick my money in an Individual Retirement Arrangement, better known as an IRA. A few years ago I realized that I probably shouldn’t let $5000 just “hang out” in my checking account doing absolutely no good interest-wise, so I looked at the pros and cons of both traditional and Roth IRAs, and I picked the one that was best for me.

Traditional IRAs

According to my investigation, the main benefit of traditional IRAs is the fact that they’re usually tax deductible up front, depending on your yearly income. In order to contribute to a traditional IRA, you must be under 70 ½ years old at the end of the tax year, as outlined in IRS stipulations. Withdrawals from the IRA – contributions or earnings – before the age of 59 ½ are subject to an additional 10% tax, in most cases. Another important consideration when investing in a traditional IRA is the possible penalty for failing to withdraw money (and pay tax on it) once you reach the age of 70 ½.

Roth IRAs

In contrast to traditional IRAs, money put into Roth IRAs is not tax deductible, and there is no mandatory age at which you must begin making withdrawals. The IRS does impose some income limits for Roth IRA eligibility, but there is no penalty for withdrawing contributed funds at any age, making a Roth IRA almost like a savings account. Since funds are put into a Roth IRA after being taxed, all money – the amount contributed and the interest earned – is tax free when withdrawn.

My IRA

For me, the choice wasn’t very difficult, and I went with a Roth IRA. Because I’m relatively young and life is unpredictable, I feel better knowing I can withdraw money from my IRA at any time, without penalty, and that my money will never again be subject to additional taxes or fees. If I ever find myself hovering on the edge of a tax bracket and really need an up-front deduction, I might consider putting some money in a traditional IRA, but right now a Roth IRA is the best option for me.

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