One thing that most of us begin to realize far too late in life is just how important it can be to properly prepare for our financial futures upon retirement. Social Security and other government entitlement programs were always created to be supplemental income during the twilight years of our lives and, as millions of senior citizens have discovered, putting forth effort to survive with just that income alone is a difficult prospect for individual.
Individual retirement accounts (IRAs) have been a popular way to make a little nest egg for retirement, as they lower the overall tax burden on your savings thus ensuring you get maximum benefit from the cash you set aside for your golden years. The continuing argument over Roth vs. traditional IRA accounts, however, can make the task of choosing the right IRA a complicated and worrisome one.
The Roth account
The chief advantage of a Roth IRA lies in the tax-exempt status of withdrawals made after retirement. This benefit extends to both the principal in the account and the interest earnings. There are a few more things to understand about Roth accounts, though, so that you know exactly what to expect. The most important is that you do have enough control over the principal in your account to ensure that you can withdraw segment of it at time – even before retirement. Anytime after the age of fifty-nine and a half, you are also eligible to withdraw the interest earned on the principal. Before that age, however, the interest earnings need to remain in the account or you will need to pay a penalty.
The Traditional IRA
Unlike the Roth, the more traditional form of the IRA commonly involves tax-free contributions to the account. The advantages to this form of IRA are many, but the primary benefit involves the lowering of your existing taxable income. Of course, the principal in your account will continue to accrue interest over time, as well as none of that interest will be taxed – until you withdraw it, that is. In addition, there’re income levels that determine whether or not your cash will even be tax exempt during the contribution phase, which is why lots of higher earners look for alternative retirement plan methods. All of this, of course, gets us back to the original question regarding the Roth vs. traditional IRA argument.
Weighing the merits
Both forms of individual retirement account have their advantages and disadvantages, with the deciding factors between the two usually depending upon the individuals particular circumstances. For instance, if you have a desire to lower the tax bracket in which you currently get yourself, a traditional option is the way to go. If, however, your bracket is relatively moderate at this point, you will likely better appreciate the value of a Roth IRA.
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