Trending Now :

What Does the Hot Inflation Report Mean for the Housing Market How Do You Build Wealth: Invest in Yourself Times Up for Programmed Money Biggest Financial Crimes: Countrywide Quantitative Tightening, Inflation, & More The Stock Market Is On Sale Investors Need to Netflix and Chill Credit Card Fixed-Interest Loans: Explained Are You Money Smart? Build Your Credit for Free Filing Your Taxes in 2022 Credit Cards that Offer 2% Cashback on All Purchases Navient Ordered to Cancel Student Loans U.S. Mortgage Interest Rates Soaring Two Big Banks Cut Overdraft Fees 2022 IPO DRAFT CLASS: Ranking the Top 10 Prospects Re-Drafting the 2021 IPO Draft All You Need to Know about Buy Now Pay Later companies Credit Card Sign-Up Bonus or SUB The Best Credit Card for the Middle-Class Make An All-cash Offer with No Cash Capitalism Always Ignores Politics All You Need to Know about the Financial crisis of 2007-2008 American Families Face Serious Rent Burden Savings Is An Expense You Can’t Build Generational Wealth If You Are Broke IT’S OFFICIAL: Robinhood is a Meme Stock All You Need to Know About Biden Mortgage Modifications & Payment Reductions Apple Card 2nd Year Anniversary: Should You Get It Now Wells Fargo to Pull Customers Personal Lines of Credit The Rise of Individual Investors The US Housing Market Is Booming. Is a Crash Ahead? Financial Literacy: How to Be Smart with Your Money Non-Fungible Token (NFT):EXPLAINED SKYROCKETED CEO PAY & LONG LINES AT FOOD BANKS Amazon Workers Want to Unionize Another Major City Piloted Universal Basic Income The New Bubble: SPACs SUBMIT YOUR PPP ROUND 2 APPLICATION BEFORE MARCH 31ST Robinhood-GameStop Hearing & Payment for Order Flow Guess Who’s Coming to Main Street Democratic Senators Say No to $15 Minimum Wage BEZOS OUT! President Biden Most Impressive Act Went Unnoticed: CFPB Biden $1.9 Trillion Stimulus Package 2021 IPO DRAFT CLASS: Ranking the Top 10 Prospects $25 Billion Emergency Rental Assistance NO, TESLA IS NOT WORTH MORE THAN TOYOTA, VOLKSWAGEN, HYUNDAI, GM, AND FORD PUT TOGETHER AMAZON TO HAND OUT ITS WORKERS $300 HOLIDAY BONUS Where Does the American Middle-class stand on Student Debt Relief? Joe Biden’s Economic Plan Explained 4 TYPES OF BAD CREDIT REPORTS AND HOW TO FIX THEM What Is the Proper Approach to Not Buy Too Much House? FISCAL STIMULUS PLANS STILL IN ACTION How to Pick Investments for Your 401(k) 10 Simple Ways to Manage Your Money Better All You Need to Know about Reverse Mortgage All You Need to Know about Wholesale Real Estate Credit card Teaser Rates AVERAGE CREDIT CARD INTEREST RATE SURGES TO 20.5 Percent Trump Signs 4 Executive Orders for Coronavirus Economic Relief The Worst American Economy in History WHY CREDIT CARDS MINIMUM PAYMENTS ARE SO LOW? 10 BIGGEST COMPANIES IN AMERICA AND WHO OWNS THEM White House Wants to End the Extra $600-A-Week Unemployment  10 Countries That Penalize Savers FEWER CREDIT CARD BALANCE-TRANSFER OFFERS ARE IN YOUR MAILBOX Private Payrolls and the Unemployment Rate SHOULD YOU BUY INTO THE HOUSING MARKET RESILIENCY? WILL WE GET A SECOND STIMULUS CHECK The Child Tax Credit and Earned Income Tax Credit THE RETURN OF BUSINESS CYCLES Should You Request a Participant Loan or an Early 401(k) Withdrawal? Homebuyers Should Not Worry about Strict Mortgage Borrowing Standards The Potential Unintended Consequences of Mortgage Forbearance All Business Owners Need to Know about the Paycheck Protection Program 10 MILLION UNEMPLOYMENT CLAIMS IN TWO WEEKS HOW WILL THE GLOBAL MIDDLE-CLASS RECOVER FROM A SECOND ECONOMIC RECESSION IN A DECADE? WILL U.S. CONSUMERS CONTINUE TO SPEND? HOW’S YOUR 401(k) PRESIDENT TRUMP SIGNS $2.2 TRILLION CORONAVIRUS STIMULUS BILL MIDDLE-CLASS NIGHTMARE: MORE THAN 3.3 AMERICAN FILED FOR UNEMPLOYMENT CLAIMS IN THE US LAST WEEK. LAWMAKERS AGREED ON $2 TRILLION CORONAVIRUS STIMULUS DEAL CORONAVIRUS STIMULUS PACKAGE FAILED AGAIN IN THE SENATE APRIL 15 (TAX DAY) DELAYED DEMOCRATS AND REPUBLICANS DIFFER ON HOW $2 TRILLION OF YOUR TAX MONEY SHOULD BE SPENT YOU CAN DELAY MORTGAGE PAYMENTS UP TO 1 YEAR, BUT SHOULD YOU? 110 Million American Consumers Could See Their Credit Scores Change The Middle-Class Needs to Support Elizabeth Warren’s Bankruptcy Plan The SECURE Act & Stretch IRA: 5 Key Retirement Changes 5 Best Blue-chip Dividend Stocks for 2020 9 Common Bankruptcy Myths 401(K) BLUNDERS TO AVOID Government Policies Built and Destroyed America’s Middle-Class & JCPenney Elijah E. Cummings, Esteemed Democrat Who Led the Impeachment Inquiry into Trump, Dies at 68 12 Candidates One-stage: Who Championed Middle-Class Policies the Most WeWork: From Roadshow to Bankruptcy Stand with the United Auto Workers Formal impeachment Inquiry into President Donald Trump America Is Still a Middle-Class Country SAUDI OIL ATTACKS: All YOU NEED TO KNOW THE FEDERAL RESERVE ABOLISHED BUSINESS CYCLES AUTO WORKERS GO ON STRIKE Saudi Attacks Send Oil Prices Spiraling REMEMBERING 9/11 What to Expect from the 116th Congress after Their August Recess Should You Accept the Pain of Trump’s Trade War? 45th G7 Summit-President Macron Leads Summit No More Upper-Class Tax Cuts Mr. President! APPLE CARD IS HERE-SHOULD YOU APPLY? THE GIG ECONOMY CREATES A PERMANENT UNDERCLASS 5 REASONS IT’S SO HARD FOR LOW-INCOME INDIVIDUALS TO MOVE UP TO THE MIDDLE CLASS ARE YOU PART OF THE MIDDLE CLASS? USE THIS CALCULATOR TO FIND OUT? WELLS FARGO IS A DANGER TO THE MIDDLE CLASS The Financialization of Everything Is Killing the Middle Class
Roth IRA and Traditional IRA
American Middle Class

Difference Between Roth IRA and Traditional IRA

The estimated reading time for this post is 248 seconds

  • The difference between the Roth IRA and the traditional IRA is to choose whether you want to save now pre-tax or post-tax dollars for retirement.
  • A traditional IRA lets you save pre-tax income and let the earnings grow tax-deferred.  You contribute to your traditional IRA before you pay federal and state income taxes, and you pay taxes only when you make the required minimum distribution (RDMs) in retirement.
  • A Roth IRA lets you save post-tax income and let the earnings grow tax-free.  You contribute to your Roth IRA After you pay federal and state income taxes, and you pay no taxes if you keep the Roth for more than five years and no required minimum distribution (RDMs) in retirement.
  • Visit the Financial Middle-Class homepage for more stories

The difference between the Roth IRA and the traditional IRA is to choose whether you want to save now pre-tax or post-tax dollars for retirement.  Besides employer-sponsored 401(k), individual retirement accounts (IRAs) are the most convenient and tax-efficient way to put money away for retirement.

Many financial experts would even argue that an IRA is a better retirement saving vehicle than 401(k) because of its flexibility.  However, we disagree because many 401(k) plans have an employer match.

 An IRA is an account that holds your investments, but they do have numerous nuances of complexities.  The goal of this article is to demystify those complexities. 

What is an IRA

An individual retirement account that lets stash money away for retirement with tax-free growth or on a tax-deferred basis.  You can open an IRA account with numerous financial institutions.  However, it’s best to open your account with a reputable discount brokerage firm.  They often have excellent customer support and low fees, and they give you access to low-cost investments. There are several types of IRAs, but Roth IRA and traditional IRA are the most commonly used.

Traditional IRA

A traditional IRA lets you save pre-tax income and let the earnings grow tax-deferred.  You contribute to your traditional IRA before you pay federal and state income taxes, and you pay taxes only when you make the required minimum distribution (RDMs) in retirement.

How it works:

Traditional IRAs are attractive for high earners who want to reduce their current tax obligations.  Your IRA contribution reduces your taxable income. 

  1. Even if you have an employer-sponsored 401(k), you can contribute to a traditional IRA
  2. Anyone can contribute to a traditional IRA, but not everyone can deduct contributions.
  3. Investments grow tax-deferred; you’re not taxed on gains until you withdraw them.
  4. Early withdrawals may be taxed as income and assessed a 10% penalty.

Benefits of Traditional IRA:

Pros:

  1. You can open a traditional IRA regardless of your income level, but your deductions are limited.
  2. You can use traditional IRA money to pay for qualified college expenses without paying an early distribution penalty. However, you’ll pay taxes on the distribution.
  3. No required minimum distribution (RDM) until you are 72 years old

Cons:   

  1. If you tap the money before age 59½, you’ll pay taxes and a 10% early distribution penalty unless your withdrawal qualifies as an exception.
  2. You must begin taking distributions called required minimum distributions at age 72.
  3. If a retirement plan covers you at work, your ability to deduct IRA contributions may be reduced or eliminated at higher incomes.
  4. No more stretch IRA, if your kids inherit your IRA, you must start taking RDMs 10 years after your death

ROTH IRA

A Roth IRA lets you save post-tax income and let the earnings grow tax-free.  You contribute to your Roth IRA After you pay federal and state income taxes, and you pay no taxes if you keep the Roth for more than five years and no required minimum distribution (RDMs) in retirement.

How it works:

If you expect to be in a higher tax bracket in the future, a Roth IRA is ideal for you. If you are a top earner, you might not be eligible to open a Roth IRA since there are income limitations.  

There are contribution limits $6,000 if you’re under age 50, $7,000 if you’re age 50 or older.

Benefits of Roth IRA:

Pros:

o   No Required Minimum Distributions (RMDs)

o   No contribution age restrictions

o   No income taxes for inherited Roth IRAs

You can withdraw the money you contributed at any time without taxes or penalties.

Cons:   

  1. If your tax bracket is lower in retirement, you will benefit more from a traditional IRA
  2. You pay your taxes upfront
  3. There are income limits  

Both traditional and Roth IRAs are excellent retirement savings accounts.  Depends on your income, you might not be able to open a Roth IRA.  If you are eligible to open either one of them, you need to analyze your current financial situation and try to create a proforma personal balance sheet for yourself.

They both let you invest in mutual funds, stocks, bonds, exchange-traded funds (ETFs), and other financial assets. Roth IRA enables you to hold personal real estate, but a traditional IRA does not.

BACK TO TOP
Continue Reading
Click to comment

Leave Comment

Advertisement
American Middle Class / Oct 25, 2022

How to Build Wealth: Start Your Own Business

The estimated reading time for this post is 567 seconds How Do You Build Wealth:...

American Middle Class / Sep 26, 2022

How Do You Build Wealth: Invest in Real Estate

The estimated reading time for this post is 436 seconds How Do You Build Wealth: ...

American Middle Class / Sep 14, 2022

What Does the Hot Inflation Report Mean for the Housing Market

The estimated reading time for this post is 100 seconds The benchmark 30-year fixed mortgage...