When you are first learning about investment accounts, one of the big questions is... traditional IRA or Roth IRA? Both of these accounts are GREAT places to be saving for your future, but the tax perks are very different!
One of the highlights for the traditional IRA is that contributions are tax deductible.
If you're saving in a Roth IRA on the other hand, your contributions are NOT tax deductible. Watch the video below to learn why this could be a GOOD thing!
It's important to know the tax rules on BOTH the traditional and the Roth IRA. It's not a case of "one is better", it's likely you will need to use both accounts in your lifetime.
Keeping up to date with our tax system, and knowing where you fall in our tax brackets is a good way to stay informed. If you find yourself in a higher bracket, utilizing tax-deductible accounts like the traditional IRA could bring you more benefit.
If you are in a lower tax bracket, you can lock in paying taxes at those low rates by contributing to a Roth.
Remember, you owe taxes on your traditional IRA when you pull the money out. All withdrawals are taxed as income, and will be taxed according to the brackets used at the time of withdrawal.
Since you are paying taxes on your Roth contributions today, you will not owe any taxes when you take money out in retirement! In the eyes of the IRS, you already paid taxes, and you're DONE!
Be aware of the age limit on IRA's! Pulling money out after age 59.5 is recommended! Before that age, you risk an additional 10% penalty!
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Hi, I'm Alicia, welcome to Friend of Finance! This site is a way for me to share helpful things I've learned from working in the financial industry, important money things that I probably wouldn't have learned otherwise, and things everyone should know about.