One way of deciding the best IRA for you, is to consider your current tax bracket versus the tax bracket you expect to be in when you retire and begin taking withdrawals from your retirement account.
Same Tax Bracket If you predict that you will be in the same tax bracket at retirement as you are in right now, then your best option is a Roth IRA.
This version of the IRA allows you to pay income tax at your current tax bracket at the time of contribution, and then later on, you can withdrawal the money without paying any tax.
This means that you will be earning interest while the money sits in the account, but since distributions are tax free, you will not be paying taxes on the interest earned.
Another perk to the Roth IRA is that you have more freedom to take your contributions out before you hit age 59 ½, as is required for the traditional IRA.
You cannot take out any earnings from your investment, but you can take the actual amount you have contributed without penalties.
Additionally, you are not required to start taking distribution payments when you reach a certain age, thereby allowing you to keep the money in the account for even more growth if it is not needed at age 70 ½.
Higher Tax Bracket The Roth IRA is also your best option if you expect to be in a higher tax bracket at the time you retire.
Since you are paying your taxes at the time of contribution, you will be paying the lower amount through the life of the IRA.
With a traditional IRA, you would have to pay taxes at your higher bracket when your required distribution payments begin.
Lower Tax Bracket The majority of people will end up in a lower tax bracket at retirement then when they are of working age, and for them, a traditional IRA could give the most payoffs in the end.
This is because most of the taxes are paid during distribution at retirement age, which will be at the lower tax bracket.
Instead of just paying all of your taxes at the time of contribution and later withdrawing tax free as with a Roth IRA, the traditional IRA takes the contribution after taxes but gives you a tax deduction, which essentially is the equivalent of not paying taxes on that portion of your income each year.
When it is time to take money out of the account at retirement, you are therefore responsible for paying taxes at your income bracket at that time.
One last consideration between these two options is what happens with the money if you pass away and the account goes to your beneficiaries.
While a spouse will likely roll either account into their own IRA and continue contributing, a major difference arises if the beneficiary is not your spouse.
Since taxes have already been paid on a Roth IRA account, your beneficiaries will receive payments without paying further taxes.
With the traditional IRA, your beneficiaries will have to pay taxes on their payments.
Same Tax Bracket If you predict that you will be in the same tax bracket at retirement as you are in right now, then your best option is a Roth IRA.
This version of the IRA allows you to pay income tax at your current tax bracket at the time of contribution, and then later on, you can withdrawal the money without paying any tax.
This means that you will be earning interest while the money sits in the account, but since distributions are tax free, you will not be paying taxes on the interest earned.
Another perk to the Roth IRA is that you have more freedom to take your contributions out before you hit age 59 ½, as is required for the traditional IRA.
You cannot take out any earnings from your investment, but you can take the actual amount you have contributed without penalties.
Additionally, you are not required to start taking distribution payments when you reach a certain age, thereby allowing you to keep the money in the account for even more growth if it is not needed at age 70 ½.
Higher Tax Bracket The Roth IRA is also your best option if you expect to be in a higher tax bracket at the time you retire.
Since you are paying your taxes at the time of contribution, you will be paying the lower amount through the life of the IRA.
With a traditional IRA, you would have to pay taxes at your higher bracket when your required distribution payments begin.
Lower Tax Bracket The majority of people will end up in a lower tax bracket at retirement then when they are of working age, and for them, a traditional IRA could give the most payoffs in the end.
This is because most of the taxes are paid during distribution at retirement age, which will be at the lower tax bracket.
Instead of just paying all of your taxes at the time of contribution and later withdrawing tax free as with a Roth IRA, the traditional IRA takes the contribution after taxes but gives you a tax deduction, which essentially is the equivalent of not paying taxes on that portion of your income each year.
When it is time to take money out of the account at retirement, you are therefore responsible for paying taxes at your income bracket at that time.
One last consideration between these two options is what happens with the money if you pass away and the account goes to your beneficiaries.
While a spouse will likely roll either account into their own IRA and continue contributing, a major difference arises if the beneficiary is not your spouse.
Since taxes have already been paid on a Roth IRA account, your beneficiaries will receive payments without paying further taxes.
With the traditional IRA, your beneficiaries will have to pay taxes on their payments.
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