There are several types of IRA's, but in this post I will focus on the two most popular ones, the traditional and the Roth IRA. So what is an IRA? IRA is an abbreviation for Individual Retirement Account. It is similar to a savings account, but unlike a regular savings account, an IRA provides huge tax benefits. You can open an IRA at a bank, brokerage firm or any financial institution. Anyone under age 50 can put up to $5000 per person into an IRA every year. If you are 50 or older you can contribute up to $6,000 per person every year due to a catch-up provision. A Traditional IRA will allow you to put before-taxed (or tax-free) money into it for retirement. If you decide to invest the money that's saved in your IRA into stocks, bonds, or a mutual fund you will not be taxed on your earnings from those investments either. However, upon withdrawal you'll have to pay taxes on both the money you deposited and your investment earnings.
A Roth IRA allows you to put after tax money into it for retirement and you can also invest the money inside your IRA into stocks, bonds, mutual funds, etc. However, unlike a traditional IRA, your investment earnings will never be taxed as long as you leave your investment earning in your IRA until age 59 1/2. Also, once you've deposited your money into any IRA, if you try to pull out your money or your investment earnings before age 59 1/2 you will pay a 10% early withdrawal fee. Below is a list of pros and cons to help you decide wether or not placing your money in an IRA will benefit you.
ROTH IRA
Pros
- You can withdraw your investment earnings tax
-free when you are at least 59 ½ yrs. of age or your beneficiary can after your death.
- Unlike the traditional IRA, you are not required to make withdrawals even after the age of 70½. You can keep the money in your account for as long as you like.
- You can withdraw all the money you deposited tax
-free because you pay taxes on that money before you put it In
- A Roth IRA can be inherited. Your beneficiaries can make withdrawals after your death.
- There is no age limit to be able to contribute to Roth IRA.
Cons
- You have to pay taxes on your money before putting in a Roth IRA, which gives you less money to invest with.
- The annual maximum deposit limit is $5000 for those below 50 yrs. old and $6000 for those above 50
-You will have to pay a 10% fee if you are going to make withdrawals before you are 59½ yrs. old.
TRADITIONAL IRA
Pros
- You can put money into this IRA before you pay taxes on It.
Cons
- Withdrawals of your deposits and investment earnings are considered as income and will be taxed.
-You will have to pay a 10% fee if you are going to make withdrawals before you are 59½ yrs. old.
-The annual maximum deposit limit is $5000 for those below 50 yrs. old and $6000 for those above 50.
-You are required to start making withdrawals whether you want to or not at the age of 70 1/2.
-No more deposits can be made after age 70 1/2.
Edited by Reginald Forest
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