I was talking to a friend today about the differences between a traditional IRA and a Roth IRA and which one each of us preferred. You can invest $5,500 into each one every year ($6,500 after the age of 50). An Individual Retirement Account, or I.R.A., is an account set up with a financial institution that allows you to save for retirement with tax-free growth in a tax-deferred account.
The main benefit of the traditional IRA is that you can deduct taxes for your annual contributions (an annual savings of around $1,320 if you’re in the 24% bracket I am in, or $1,560 after the age of 50). The account then grows tax-free until you start making withdrawals in retirement.
For the Roth IRA, you cannot deduct taxes on the contribution each year, but the account also grows tax-free and you do not have to pay any taxes when you draw on the account in retirement (an added benefit is that you can withdraw contributions without paying a penalty before the age of 59-1/2).
Due to eliminating debt and being able to live on less income when I decide to retire, I am going for the tax write off at 24% now, while hoping to stay in the 12% tax bracket in retirement, meaning I’ll withdraw money being paid from from a higher tax bracket now at a lower rate in the future. However, for folks in a lower tax bracket, and especially those not paying any taxes, a Roth is likely the better choice.
Of course, tax laws and situations change, but for now, this seems like the smart choice for me…