Roth Or Traditional Ira?

Roth Or Traditional Ira?

When you start to look at your retirement options one of the first questions that will come up is whether you should go with a Roth or traditional IRA. There are always a lot of things to consider when making these kinds of decisions but the main difference between the two options are your current, and future, tax obligations.

An IRA, or, independent retirement account, is something you set up on your own. Unlike a 401k plan, which you set up through your employer, an independent account requires you to go out and find a company to handle your account for you. You will pick your investments on your own, or with the help of a financial advisor, and generally have a lot of control over what happens with your money. The maximum contribution limits change each other but as of 2010 they are set at $5,000 for people up to 50 years old and people between the ages of 50 and 59 1/2 years old have the option of an additional $1,000 catch up contribution.

A traditional account takes the contributions for your retirement from your pretax investment. Because this money is taken out before taxes you can use the money you would have used on taxes to invest and grow your account further. When you withdraw this money in retirement, after the age of fifty nine years and six months old, you will then pay taxes on this money. The advantage here being that you will have grown your nest egg over the years, and you be able to currently lower your income level for your federal taxes this year and pay a lower percentage in taxes currently.

A Roth account is similar to the traditional in most ways except for the taxes. Your contributions are taken out of your income after taxes, which means that you will not pay taxes when you withdraw the money in retirement and this will not lower your current years income level. If you think you be paying a lower tax percentage now than you will be in retirement this option can save you money, and if you have a traditional 401k account as well then a Roth account will help diversify your tax obligations.

If you don't feel confident in your decision it's always good to learn more about your options or talk to a financial advisor until you feel confident. Always keep in mind that no matter what you decide to do you are saving for retirement, and that's the most important part.