IRA vs. Roth IRA

You have decided to open an IRA. Congratulations. This is a good investment decision. Now the question is which type of IRA should you open? This is a large decision with potentially large financial ramifications. There is quite a bit of difference between the two types of IRAs. Let's look at how each one is set up. Hopefully this will help you make a decision and chose the right IRA that works best for you.

First, let's look at a traditional IRA. Here are some points to think about as far as these IRAs are concerned.

1. The contributions to a traditional IRA are tax deductible depending on your income level.

2. Withdraws begin at 59 ½ and are mandatory at 70 ½.

3. The funds in your IRA can be used to purchase a wide variety of investments such as stocks, bonds, mutual funds ect.

4. These IRAs are available to anyone without income restrictions.

5. If you take money out of your IRA before you reach the age of 59 ½, there is a penalty of 10% on funds that you withdraw.

As far as the Roth IRA is concerned, the rules are substantially different.

1. Contributions to a Roth IRA are not tax deductible.

2. There is no mandatory age in which distributions are required to start.

3. All of the earnings and the principal in a Roth IRA are tax free if the rules and regulations are properly followed.

4. The Roth IRA is only available to individuals making up to $95,000 annually and married couples making up to $150,000 a year.

5. As with traditional IRAs, the funds can be used to purchase a wide variety of investments.

In the end, you have to ask yourself if you want to pay the taxes on your money now, or later. This all depends on what tax bracket you are in now, and what tax bracket you will be in when you retire. This can be difficult to determine, but if your household brings in a substantial amount of money at this point, when you retire your income may be less. This would lead you to believe that you would rather pay your taxes at that point when you withdraw money from your IRA.