Confused to choose between the traditional IRA and Roth IRA savings for your retirement funds? First of all, it is important to understand the differences. The types of long-term savings can greatly affect our financial lives. Therefore, a full comprehension on both savings is needed to be able to make the best decision that suits our situation. Despite the fact that the requirements and benefits can vary according to different traditional and Roth IRA Providers, here are some things to consider.
Income limit
This is the key consideration. In traditional IRA, any individual with earned income can join the traditional IRA as long as he or she is not older than 70, 5. However, the requirement is not that simple in Roth IRA. A single tax filer cannot have a gross income of more than $131.000 while a married couple cannot exceed the limit of $193.000. If they do, they are not eligible.
Tax
Both kinds of IRA have its own tax breaks, the difference is the timing. For Roth IRA, the contribution is not tax deductible (the traditional IRA is). However, the withdrawal is free of tax. In conclusion, we avoid paying some taxes when we put the money with traditional IRA. Conversely, we avoid the taxes when we take out some money with Roth IRA.
Therefore, it really depends on our expectations. If we expect the income tax rate on our retirement higher than today, it will be a good decision to choose Roth IRA fund. If it is expected to be lower, than it is better to avoid paying the tax while contributing than withdrawing. It is a difficult situation to predict but we can analyze the possibilities based on our current tax bracket, our increase or decrease expectations of future income, and other personal financial situations.
Withdrawal requirements
The traditional IRA makes it compulsory that we take some of our contributions at the age of 70 and ½. The requirement is not found on the Roth IRA. If we do not need to withdraw, we can let the money grow free of tax for the rest of our lifetime.