IRA's or individual retirement arrangements are an important component of any well rounded retirement plan. Individual retirement arrangements are a blanket term for several different types of retirement accounts, which confer different benefits that are important to understand. This article details these different types of plans, and informs readers about the advantages and disadvantages of each of these offerings. What's important to remember is that there is no universally perfect plan -- that is, while one plan might be the best for some, it is often not the best choice for others. Let's dive in.
The most popular type of IRA is the traditional IRA plan. The so called "traditional" plan has one key benefit: up to a certain maximum amount, contributions are not taxed in the current tax year. Effectively, this means that any funds you put in the plan (up to the maximum contribution), will be deducted from your taxable income. Depositing money into a traditional IRA can reduce your taxes in the current tax year. Later, when funds are withdrawn, taxes must be paid on distributions.
The second most common type of individual retirement arrangement is the Roth IRA. The Roth IRA, named for the Senator of the same name, has one key difference with the traditional IRA. With the Roth IRA you pay taxes on your contributions in the current tax year and do not get to claim a deduction immediately on your taxes. However, later on down the road when you withdraw your contributions, you do not have to pay taxes on the distributions or on the money that the distributions earned.
The right choice for you may boil down to one key factor. If you are convinced that your income will increase over your lifetime, it may be a better choice to pursue a Roth IRA, since your tax rate would ultimately be higher. On the other hand, if you expect that your income will stay the same or decrease, then a traditional IRA might be the better choice for you. Regardless, it's important to do the math to see what plan is a better choice.
This article has indicated the key differences between the Traditional IRA and the Roth IRA. Ultimately making a decision about which one is the best fit for you will have an impact on your retirement savings potential. You must consider not only the tax factors, but also your income eligibility and other factors, so ensure that you fully research the subject before you commit.
The most popular type of IRA is the traditional IRA plan. The so called "traditional" plan has one key benefit: up to a certain maximum amount, contributions are not taxed in the current tax year. Effectively, this means that any funds you put in the plan (up to the maximum contribution), will be deducted from your taxable income. Depositing money into a traditional IRA can reduce your taxes in the current tax year. Later, when funds are withdrawn, taxes must be paid on distributions.
The second most common type of individual retirement arrangement is the Roth IRA. The Roth IRA, named for the Senator of the same name, has one key difference with the traditional IRA. With the Roth IRA you pay taxes on your contributions in the current tax year and do not get to claim a deduction immediately on your taxes. However, later on down the road when you withdraw your contributions, you do not have to pay taxes on the distributions or on the money that the distributions earned.
The right choice for you may boil down to one key factor. If you are convinced that your income will increase over your lifetime, it may be a better choice to pursue a Roth IRA, since your tax rate would ultimately be higher. On the other hand, if you expect that your income will stay the same or decrease, then a traditional IRA might be the better choice for you. Regardless, it's important to do the math to see what plan is a better choice.
This article has indicated the key differences between the Traditional IRA and the Roth IRA. Ultimately making a decision about which one is the best fit for you will have an impact on your retirement savings potential. You must consider not only the tax factors, but also your income eligibility and other factors, so ensure that you fully research the subject before you commit.
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