How Do I Choose the Best IRA for Me?
An IRA is a must when you need to put money away for your retirement. You can do this whether you have a retirement plan through your place of employment or if you are self-employed. You can even start an IRA for your future if you are not employed but have concerns about your future. Of course, one of the most important things is to choose the best IRA for you as there are more than one type. You can make your decision based on your income and tax advantages.
A traditional IRA may be appropriate for you. There are two main kinds of traditional IRAs. There is the traditional and the Roth IRA. The traditional lets you write off any and all contributions from taxable income, which makes the contributions pre-tax so that you can write them off. However, any withdrawals made on this IRA are taxed. A Roth IRA, on the other hand, does not have tax deductible contributions but you accumulate tax deferred investment earnings. With a Roth, you do not pay any taxes on withdrawals under some conditions, but you have to wait five years after setting up your account before you can make your first withdrawal. Thereafter, you are allowed to make withdrawals, but only once you reach the age of 59½.
Pre-tax contributions are important when you are considering which type of IRA is best for you. For example, with a traditional IRA account, if you make tax deductible contributions of at least $5,000 and you are within the 25 percent tax bracket, you can invest a total amount of $5,000. However, if you contributed $5,000 to a Roth IRA, you would only earn an investment of $3,750 after taxes. Generally speaking, when you take this into consideration, a traditional IRA is far more attractive than a Roth IRA as you will earn more money off of it. With a Roth IRA account, you are not only required to wait five years after it has been established but you must wait until you reach the age of 59½ before you can do anything with it. Your tax deductible contributions are also more pronounced if you fall under the category of a lower tax bracket once you retire, you will receive a lower income from the IRA as well.
With a traditional IRA, you can contribute to it for as long as you like until you reach 70½ years of age. You also have to receive at least a minimum distribution for each year. On the flip side, with a Roth IRA, you can contribute to the account no matter what your age and there are no minimum contribution requirements.
One of the limitations of a traditional IRA account is if you or your spouse have a pension plan with your place of employment. For instance, you are not able to deduct any contributions if you earn an adjusted gross income or AGI of $69,000 or greater. However, you can open a Roth account if your AGI is under $188,000 if you are married or $127,000 if you are single.