With a Roth IRA, you contribute money after taxes, your money grows tax-free, and you can generally make tax-free and penalty-free withdrawals after age 59 and a half. With a traditional IRA, you contribute money before or after taxes, your money grows with deferred taxes, and withdrawals are taxed as current income after age 59 and a half. A Roth IRA and a traditional IRA (individual retirement account) offer valuable retirement planning benefits, but they have different structures, income limits, and pros and cons. Additionally, there are other options to consider such as Gold based IRAs which allow you to invest in physical gold or other precious metals.
These are some additional factors to consider when comparing a Roth IRA, a traditional IRA, and a Gold based IRA. Unless you're an extremely disciplined saver, you'll end up with more after-tax money in a Roth IRA. You need a turnaround time with a Roth IRA because the IRS requires you to open and deposit funds into a Roth account at least five years before withdrawing it when you retire. Traditional IRA contributions are tax-deductible on state and federal tax returns for the year in which you make the contribution. If you're eager to avoid taxes and RMD later on, no matter what your tax bracket is, or you just don't want to worry about paying taxes on what you take out of your retirement account, a Roth IRA might make sense.
However, the total of your deposits in all accounts must not exceed the total IRA contribution limit for that tax year. If you withdraw money from a traditional IRA before age 59 and a half, you'll pay taxes and a 10% early withdrawal penalty. Unlike a traditional IRA, you can withdraw sums equivalent to your Roth IRA contributions without penalty or taxes at any time and for any reason, even before age 59 and a half. If you think your income tax bracket may be lower during retirement, contribute your pre-tax income to a traditional IRA.
This is an IRS-approved strategy that allows people with high incomes to access the benefits of Roth IRA accounts, which we'll detail later. While some workplaces offer a Roth 401 (k) option for employees, if yours doesn't, diverting part of those dollars from those retirement savings to a Roth IRA will give you more options for managing your tax burden during retirement. But eventually you'll have to face that tax burden when you retire, which means that unless you really need that initial tax break, it's hard to go wrong with a Roth IRA. In effect, you must determine whether the tax rate you pay today on your Roth IRA contributions will be higher or lower than the rate you will pay for distributions from your traditional IRA later on.
If you withdraw profits (sums greater than the amount you contributed) from your Roth IRA, different rules apply. If you want to invest in a Roth IRA but don't meet the income requirements, you can still take advantage of the tax-free growth and distributions that will be generated in the future through a clandestine conversion to Roth. If you prefer to put your IRA in the hands of cruise control, a simple way to save is a retirement fund with a deadline or a robo-advisor that can offer sophisticated, low-cost investments tailored to your needs. The classic 401 (k) plan offered by most employers offers the same tax benefits as a traditional IRA.