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…
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