Ladies and gentlemen…Traditional and Roth IRAs.
A few weeks ago, I had a meeting with a financial adviser to discuss opening a retirement account. “But you’re only 22!” you might say. Yes I am only 22, but apparently you’re never too young to start planning for retirement. However, the meeting was less than helpful, so I thought I would try to find some things out for myself. I used to write articles about financial issues based on a few keywords and internet research, so I thought I would try it again.
What is an IRA?
An IRA is a type of retirement account. It stands for Individual Retirement Arrangements. It’s different from a 401K because a person does this on their own instead of through their place of employment. If you qualify for a 401K, you most likely want to use that because your employer will often match a certain amount of your contributions. However, if you’re like me and are only employed part-time, or are self-employed for instance, you can make your own IRA so that you still have something.
What’s the difference between traditional and Roth?
The Internal Revenue Service has a chart here, but a lot of the difference is about when it’s taxed. With a Traditional IRA, you can put your annual contribution as a deduction on your taxes, but then the money is taxed as income when you withdraw it. If you have the Roth IRA, you don’t get a deduction, but then it isn’t taxed when you withdraw it. Unless, that is, you withdraw it early.
When am I supposed to withdraw it?
You have to wait until you’re 59 and a half years old before you should withdraw from either IRA. While you can withdraw at any time, withdrawing before that time (except in certain situations) could result in a 10% tax. Plus, with the Roth, you’d have to pay the income tax. Also, with traditional IRAs, you have to take out a certain amount every year once you reach 70 and half years old. (What’s up with all this “and a half” stuff? Is the government 9?)
So which one do I pick?
…I don’t know. I think it depends on if you think you’re making more money now than you will in 40 years or if you think you’ll be making more money then. Not that there’s really a way to know that. All I present to you here is the difference. All of my information comes from irs.gov. Oh, one more thing…
Why open and IRA account instead of just a savings account?
Because the IRA account is likely to make more money. It’s also a little more risk, but it can build more. And you should always save for retirement, unless you want to continue working until you die. Or you plan to hit the jackpot.