All About Roth: Deciding Between a Traditional and Roth IRA

Posted by bpaul as Investments, Money Management

Basically, the major difference between a tradional IRA and Roth IRA is the way Uncle Sam treats the money you invested. If you invest in a tradional IRA you can deduct the contributions from your taxable income within that calendar year. Which means that if you earned $50,000 and you contributed $5000 to your IRA account, you would only pay taxes on $45,000. The $5,000 you contributed during the year has been tax deferred. With a Roth IRA you cannot deduct the contributions you made that year, so using the example above you would of had to pay taxes on $50,000 because your IRA contributions were not tax deferred.

So basically a tradional IRA is the way to go?

Well not exactly, it all depends on your current financial situation….

With the traditional IRA you will eventually have to pay taxes on all accumulated interest, capital gains, and dividends you made from that investment over the years. However, with a Roth IRA you would not have to pay taxes on any capital gains, or interest you made from that investment. So when you turn 59 1/2 (the current age limit you can begin to withdraw your money without incurring a penalty) you will be doing the running man dance all the way to the bank because Uncle Sam can’t touched that money.

As for me, I’m currently invested in a traditional IRA because at time I opened up my IRA account I needed a much needed tax break. However, if I had to do it over again I would have invested in a Roth IRA. With all the flexibility, savings power and tax free money a Roth IRA provides, you would be a fool not to make it part of your retirement portfolio.

Basic Guidelines and Benefit for a Roth IRA.

Can contribute up to $4,000 to Roth account. Contribution limit rises to $5,000 in 2008
Unlike a 401k you can place your money in almost any investment vehicle from stocks, bonds, mutual funds, and real estate.
Money is tax free during withdrawal period. Again, that’s after age 59 ^1/2, and your account has been open for at least five years.
You are able to cash out up to 10,000 to buy a new home.
You can withdraw funds to help pay your child’s college education.