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Why You Should Consider Starting a Roth IRA

Both the Roth and Traditional IRAs have great tax advantages, but is one better than the other? Read here to find out.

Posted on October 26, 2020

trad v roth

Retirement. Maybe it's a long way off, or maybe you're starting to see the light at the end of the tunnel. Regardless, it's never too late to start thinking about how you'll finance your golden years. And a Roth IRA is a great retirement account that offers some unique advantages over its competition.

Let's start with the basics right now.

What is a Traditional IRA?

A Traditional IRA is an individual retirement account that lets you make contributions that can be fully or partially deductible towards your taxes. Further, the earnings and gains are not taxed until you make a withdrawal.

Simply put, you contribute money every year, earn interest, and don't pay taxes on the income until you withdraw later. However, there is a withdrawal penalty of 10% for withdrawing funds before age 59 1/2. 

How Does That Differ from a Roth IRA?

A Roth individual retirement account is the younger sibling of the Traditional IRA. They are similar in that they offer tax-free growth for investments within them. 

The key difference between a Traditional IRA and a Roth IRA is when you get to claim your tax break. A Traditional IRA, you pay taxes when you withdraw from it, while a Roth IRA has you pay taxes upfront.

Roth IRAs do not have age restrictions but do have annual income-eligibility restrictions. Further, you can draw from your Roth IRA contributions at any time without penalty. You will pay a withdrawal penalty if you pull from your earnings before 59 1/2, similar to Traditional IRAs.

Both types of IRAs can have funds drawn from for first-time home buyers.

Why Choose a Roth IRA Over a Traditional IRA?

A Traditional IRA can have advantages: by deducting your IRA contributions upfront, you effectively lower your adjusted gross income (AGI) for the year. This can potentially help you qualify for tax incentives, such as student loan interest deductions.

A Roth IRA has you pay the bill upfront. Your contributions are still taxed as income and don't lower your AGI. However, any withdrawals you make in retirement are generally tax-free.

If you're maximizing your yearly contribution for a Roth IRA, the compounded interest, year-over-year, can heavily outweigh the initial upfront costs.

Generally speaking, if you think you'll be in a higher tax bracket when you retire-- especially true for those just entering the workforce-- a Roth IRA is the better choice.  

Paying the taxes today, while you're in a lower bracket, will allow you to reap the tax-free rewards later, instead of paying for them in your higher tax bracket.

What if I Already Have a Retirement Account Through Work?

Whether it's a 401k or different type of retirement plan, you're still eligible to start a Roth IRA and can make up to the appropriate contribution depending on your income level and filing status.

The compounded interest earned in a Roth IRA can be especially advantageous if you're just entering the workforce. Likely your income level is below the threshold, and you'll maximize interest returns year over year.

How Do I Get Started?

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Both a Roth and traditional IRA are great for retirement. Because of their accessibility, virtually everyone should take advantage of the tax benefits they provide.

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