The importance of planning and saving for retirement is mentioned over and over again. Your retirement savings goals should be the main portion of your overall financial plan. How are you going to prepare for the retired life you want to live? Contributing to a retirement account, like an IRA, is one of the best ways to get there. An individual retirement account (IRA) is a personal, tax-deferred account for people who are employed(1). An IRA can be established at almost any financial institution and there’s a variety of investment options you can choose from to fund the account.
There are two main types of IRAs that help save for retirement. Understanding the difference between both types, the pros and cons of each account, will better prepare you for saving for your future.
Roth IRA
A Roth IRA is a variation of an IRA account with tax-free growth and tax-free qualified withdrawals. It allows you to withdraw principal and earnings tax-free after age 59½ as long as the contributions have been in the plan at least five years(1). Roth IRA contributions can be made at any age with after-tax dollars, and allow you to contribute for as long as you like, given you have earned income. In 2019, the maximum contribution amount is $6,000, but $7,000 if you are 50 or older. You can contribute to a Roth IRA as long as you have earned income and it’s below a certain level. There is no age limit.
Traditional IRA
A Traditional IRA, on the other hand, is an IRA account with tax-deferred growth and tax-deductible contributions (reducing your current tax liability). Unlike a Roth IRA, a Traditional IRA has no income restrictions, but only allows you to contribute until you reach age 70½(1),. Your contributions are also limited to $6,000, or $7,000 if you are 50 or older. The other main difference between Traditional and Roth IRAs is that Traditional IRAs require that minimum distributions (RMDs) (withdrawals) start no later than when you turn 70½(1).
Establishing a retirement account is one of the best uses of your income and options for retirement savings. Not only are most of these accounts are tax-free, but they also grow over time. Familiarize yourself with IRAs, educate yourself on the importance of saving and set yourself up for a successful retirement life.
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