If you’re a beginner to the investing world you may have heard the terms IRA or Roth IRA or 401k tossed around. However what you may not know is which of these types of accounts would be the best for you to save for your retirement.
In this article I’m going to cover why the Roth IRA has a distinct advantage over almost all the other retirement accounts out there and give you the best Roth IRA advice to help you have successful retirement?
What Is A Roth IRA
First off, before I can give the benefits you need to know what a Roth IRA is first. To keep it simple think of an IRA or Roth IRA as the shell of your investment account.
Most people believe an IRA is a type of investment like a mutual fund, it is not. Instead it is a shell that houses your investments which could be anything from stocks, mutual funds, bonds, to exchange traded funds.
This shell, the IRA, gives special tax privileges for saving money for your retirement. For example a Roth IRA gives a special after tax privilege that means when you retire you will not have to pay taxes on any of the money in your retirement account because you paid them before hand.
On the other hand an IRA is the exact opposite. With an IRA you will have to pay taxes on every dollar you spend when you enter the distribution phase of your retirement.
However the Roth IRA still some of the same taxes laws as the IRA like the 10% tax penalty when you pull funds from your account before age 59 and a half. On top of that they both have the save contribution limits as well. As of 2010 you will only be able to put $5000 in your account per year but if you are 50 and older you put $6000 in per year.
Finally, with the IRA and the Roth IRA you can only get the tax benefits offered through these two programs if make less than $120,000 if you fill single or $176,000 if file your taxes jointly.
So if so many things are similar between IRA’s and Roth IRA’s why would you want to choose the Roth account over the traditional IRA?
Why The Roth Is Better
Of all the similarities between the Roth IRA and the IRA you might be wonder why would the Roth be better. Of all the best advice on Roth IRA accounts the advantage of paying your taxes later is the best advantage.
The reason for this is because in your retirement years your tax burden will actually increase. Here are a few reason why this will happen.
- First off, when you retire your home will be paid off and you will no longer be getting a tax break from the interest you have been paying on your home.
- Second, when your kids grow up and move away you will no longer be able to claim the $1000 tax deduction.
- Third and finally, when you are retired you will no longer be contributing to your companies 401k plan or personal IRA. With these types of accounts your money is all tax deductible.
These three tax burdens you will pay more taxes as a result of when you retire leaving your golden years a little less golden. In order to avoid paying the higher taxes in your retirement years you should look into also contributing into a Roth IRA as well to avoid paying these higher taxes.
In the end consider these Roth IRA tips along side other retirement accounts and know that this could mean the difference between you having an OK retirement to having a great retirement.