Both the traditional individual retirement account (IRA) and the Roth IRA offer key tax advantages. A traditional IRA allows you to deduct all or part of your contributions, depending on your level of income, and your balance increases with deferred taxes. With a Roth IRA, you invest the money after taxes, but you can withdraw money tax-free if you're at least 59 and a half years old and have owned the account for at least five years. Plus, compared to workplace plans, you have access to more investment options.
The main disadvantage of a conventional IRA is the ability to apply early withdrawal penalties. If you make a distribution before your 59th birthday, you'll have to pay an additional 10% tax penalty, unless you qualify for an early withdrawal exception. Nor will you have to worry about early withdrawal penalties or other taxes. You can then use your account the same way you would if you started with a Roth IRA.
Of course, you'll want to look at some of the factors that influence the use of these accounts. Consider the amount of your taxes if you withdraw the funds and transfer them. While the cash goes to your traditional IRA, you shouldn't pay taxes on any of your investment gains. This makes traditional IRAs especially useful if you assume that you'll pay a lower tax price when you retire than when you make the contribution.
Both traditional individual retirement accounts (IRAs) and Roth IRAs are investment vehicles widely used by workers trying to accumulate long-term assets. In a traditional or Roth IRA, you can invest in all types of traditional financial assets, such as stocks, bonds, exchange-traded funds (ETFs) and mutual funds. In other words, you can deduct all or part of your contributions to a traditional IRA, but you'll have to pay income tax on withdrawals during retirement. Traditional IRAs are preferable for people who expect to be in a lower tax bracket when they retire, while Roth IRAs are best for those who are now in a lower tax bracket.
While Roth IRA contributions are made with after-tax dollars, traditional IRA contributions are made with pre-tax dollars. Remember that a Roth IRA generates after-tax income, while a traditional IRA generates pre-tax income, so you'll have to pay taxes on what you've already invested. Keep in mind that while traditional IRA distributions should not be taxed before retirement, distributions are taxable in the case of a traditional IRA.