Let’s take a look at a common debate the Roth IRA vs Traditional IRA. First, IRAs or individual retirement accounts are currently the bedrock on which the American retirement system is founded. However, this may change in time as certain individuals in Congress have expressed concernd about the current system and suggested mandatory government retirement accounts instead of IRAs. We will see where this debate will take us, but realize that the current structure of IRAs is probably not going to be around forever. Never the less, we will take a look at the IRA system as it is presented constituted even though individual retirement accounts may become a thing of the past.
Let’s look at the Roth IRA vs Traditional IRA debate.
First, what is the difference between a Roth IRA and a Traditional IRA. There are several minor differences between the two accounts however there is really only one difference that we as consumers need to keep in mind. This is the main difference between Roth IRAs and Traditional IRAs. That difference is as follows: Deposits made into a Roth IRA are taxed upfront while in a Traditional IRA you pay the taxes on your contribution when you withdraw the money in your retirement. In both the Roth IRA and the Traditional IRA your money is allowed to grow over time untaxed. Thus, IRA’s have become a popular vehicle for retirement planning as removed from taxation your money can grow at a profoundly accelerated rate. And for this reason, because the government is not getting a cut of your money (and a substantial cut at that) many in the government want to take a serious piece of your individual retirement account or abolish the individual retirement account all together.
But, back to our discussion of the Roth IRA vs. Traditional IRA. Realize that with either IRA the growth on your money will be tax free. The major difference between Roth IRA and traditional is that in the Roth you pay taxes on your contribution up front while with the Traditional IRA you will be able to claim a tax deduction for your contribution. Therefore when you take distributions from the Traditional IRA your distributions will be taxed. We will get back to this in a moment. Remember that this is the system right now and after the recent changes in the make up of the executive and legislative systems in government there are rumblings that this will change in which case you will no longer enjoy the tax benefits of the current retirement account system. However there are a couple of more elements in the Roth IRA vs Traditional IRA debate that we should look at. One key difference is in how age is treated with a Roth IRA vs a Traditional IRA. At the moment, in a traditional IRA you can only make contributions into your account until you reach the age of 70.5 years. This is simply not the case with a Roth IRA. In the Roth IRA there is no deadline or sunset regarding age and contribution caps. You can continue to fund your Roth IRA until you turn one hundred years old if you so desire. Many observers also feel that the freedoms provided by the Roth IRA make it a likely target to be eliminated by the federal government sometime soon because the government doesn’t see why you would want to fund your IRA at some advanced age and it doesn’t want to allow you to continue you to do it. Again, we will see where the age restrictions and the IRA end up in time but for now this is a key difference between the IRA and the Roth IRA.
Another difference between the Roth IRA and the Traditional IRA is in the distributions with are essentially withdrawals of your money from your account. With the Traditional IRA you are required to take distributions from your account when you hit a minimum age of 71.5 years old. At this point distributions are required by law whether or not you want to take them or not. With the Roth IRA this is not the case. The Roth IRA allows you to leave your money untouched until you need to withdraw it regardless of your age.
At this point in the Roth IRA vs. Traditional IRA debate you might be wondering if the Roth IRA is the better choice? I would caution you read on and finish the article (and also seek professional advice) before you make your final decision about which is better.
Another distinction that needs to be drawn between Roth IRAs and Traditional IRAs has to do with taxes. It is essential that you realize that the distributions drawn from a traditional IRA are taxed in the same fashion as income and not, as some of you might have believed, as capital gains. If you are drawing other income from sources like a job or something else that you are making money on, you must realize that your distributions from your Traditional IRA will be added to your current income and as a result your total income could get bumped up to a higher tax bracket. So, their can be that tax disadvantage of the traditional IRA. Since the Roth IRA distributions are not taxed then this is not an issue with the Roth IRA.
At this point in the Roth IRA vs Traditional IRA debate some might say that the Roth IRA looks like a better choice. I can not say with any certainty if this is the case, and I recommend that you consult a tax professional (which I am not) in order to decide how to proceed. As a result of this debate, some of you may be wondering why the IRA system will be abolished. The issue comes down to money. The government believes that they are entitled to a percentage of your retirement account in order to operate the government and provide services to citizens. As a result of this few believe that the government will be able to resist the urge to disturb the current IRA system in order to begin taxing the money. We will have to see where this debate over IRAs will take us.
Regardless, I hope you have found this illustration of the Roth IRA vs Traditional IRA helpful and informative.