Question: Please explain Roth IRA rules. What is best: a traditional IRA or a Roth IRA?
Answer: Both a Roth IRA and a traditional IRA are excellent options to help you save for retirement.
Understanding the rules for each product will help you decide if you qualify and which one is right for you. IRA products are similar in some ways to 401k rules, but you should not be confused by the two, these are separate investment products.
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"Money is a good servant but a bad master."
- Francis Bacon |
Individual retirement accounts are structured systems designed to help you save money. They help keep you on track by enforcing strict penalties on early Roth IRA withdrawals. Both Roth and traditional IRA options will help you save for your future but they operate a bit differently.
The biggest distinction between the two ira options lies in the taxation of the funds.
The Roth IRA was named for the late Senator William Roth of Delaware, who was the chief sponsor of the legislation that allows for these accounts. It is a very popular plan because of the tax-related benefits it offers its owner.
The Roth IRA allows you to deposit money that has already been taxed into an individual retirement account. You can withdraw funds from this account at retirement age, without paying any additional taxes on it. Therefore, you will not be paying any taxes on the interest you’ve earned while saving. This is a huge benefit that makes this product highly attractive.
However, Roth IRA rules dictate that only those who meet certain income guidelines are able to qualify for this type of account. Your CPA or investment representative can tell you if you meet the income qualifications.
You should also understand that your contributions to a Roth IRA are not tax-deductable.
This differs from a traditional IRA, where you put money in pre-tax and pay taxes on the investment and the interest upon withdrawal. All of your contributions here are tax-deductable.
For instance, you may choose to have your employer automatically deduct the amount you want to save directly from your paycheck and deposit it into your IRA. This will occur before you pay any of the taxes on your income.
When you retire and begin to withdraw those funds you will also begin to pay the taxes on both your original investment and any interest you have earned. You could feasibly be paying up to 30% in taxes on these withdrawals.
Not so with the Roth IRA - at the time you begin to make withdrawals Roth IRA rules allow you to make them tax-free.
Either option is a good choice so if you do not qualify for the Roth IRA because your household income is more than $150,000 per year, don’t be too disappointed. (At least you’re making that much! Be thankful.) This number may change from year to year as tax laws change so be sure to confirm the Roth IRA rules with your CPA.
The great news is that the impact of either plan can be extremely positive for you and your spouse during your golden years of retirement. Whether we are giving 401k advice or IRA advice – our direction is the same, if you have not yet began to save, begin today and save as much as you can afford.
Having a structured savings plan to ensure your standard of living during retirement is something everyone should have in place.
"The only way not to think about money
is to have a great deal of it.”
- Edith Wharton |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
