It is common to have questions as you compare a Roth IRA vs a Traditional IRA. It is important to answer these questions before investing your money.
The question of whether to fund a Traditional IRA or Roth IRA is a big financial decision that will affect you now and in retirement. Although both allow you to save for the future, there are several pros and cons to each one.
Some of the Differences
When you compare a Roth IRA vs. Traditional IRA you will quickly learn about one major difference: the way that you are taxed.
For example, if you earn $35,000 per year and put $3,000 in a Traditional IRA, you will only pay tax on $32,000 in income. Upon reaching 59 ½, you can withdrawal these funds. At that time, you will pay tax.
If you put the same $3,000 in a Roth IRA, your situation is a bit different. Upfront, you will not receive any tax deduction. While this seems like a “bad deal” keep in mind that you can withdrawal the money tax free at age 59 ½.
Another difference comes into play if you decide to take distributions before reaching 59 ½. With a Traditional IRA, early withdrawals are penalized at 10 percent. Along with this, you have to pay any tax that is due on the money. With a Roth IRA, you can withdrawal the principal amount at any time without incurring a penalty. The only time you will be penalized is if you withdrawal earnings that your money has made.
Do you qualify for a Roth IRA? Unlike a Traditional IRA, you may not qualify. Your eligibility is based on your income. Your adjusted gross income must be below these limits: $105,000 for single or head of household and $166,000 for married filing jointly.
No matter which type of retirement account you decide on, be sure to first compare a Roth IRA vs. Traditional IRA.