BBefore we go any further, we must first establish what IRA means. We are talking about an Individual Retirement Account (IRA). This is a perfect way to save money for your retirement and properly pay for it taxes as well. It’s a program that has been designed for self-employed people who don’t work for major companies that do have a 401(k) plan. In a nutshell, there are two types of IRA and we are going to talk about their pros and cons. Depending on a person’s situation, they can either choose the Roth IRA or the traditional IRA.
Even though both of their goals are similar, there are some important differences one needs to learn how to identify in order to choose what’s best for your interests. Let’s begin with traditional IRA, which allows you to contribute a portion of your money on pre-tax dollars. This reduces your taxable income for the year as you set aside some of that cash for retirement. These taxes will be due when you withdraw your cash.
What about the Roth IRA?
The Roth IRA allows people to contribute with post-tax dollars with no immediate tax savings. However, once you retire, the amount that has been paid and the money it earns are completely tax free. Those are the major differences between both options. But the key difference lies in the timing of their tax advantages. Traditional IRA helps you deduct contributions now and worry about paying taxes on withdrawals later.
Roth IRAs allow people to pay taxes on contributions now and get tax-free withdrawals later. Depending on how you usually take care of paying your taxes, one option will seem more appealing to you than the other. In a sense, traditional IRAs do function like personalized pensions. They restrict and dictate access to funds in return for considerable tax breaks. Roth IRAs work like regular investment accounts, which is only with tax benefits. They tend to have fewer restrictions but way less breaks.
Considering one or the other if you’ve always been an independent worker is essential in order to have a proper plan post-retirement. Both are great options, but only one will work best for you. Choose wisely and check out more details on how IRA’s work with a financial planner who will help you make a better decision about the program that’s best for your needs.