Planning for Your Future: Is a Traditional or a Roth IRA Right for You?

Planning for Your Future: Is a Traditional or a Roth IRA Right for You?
If you're like countless other Americans who have struggled to keep up in today's economy, you might be starting to see the importance of saving for retirement in a new light. In an effort to invest for the future, people are opening individual retirement accounts, or IRAs. With multiple types of IRAs available, there's an investment plan that is right for everyone. Sharing many similarities and numerous benefits, the traditional IRA and the Roth IRA are the two most popular types of accounts. Before opening a new account, it's important to consider which of these plans offers the investment strategy you need.

Understanding the basics of Traditional and Roth IRAs
In many ways, the Roth IRA is similar to a traditional IRA. Both plans allow you to earn interest on your savings for retirement, which helps you to be prepared for the later stages of life. You'll earn tax benefits with either plan, but they'll come at different times in your life. With a traditional IRA, the income you contribute to your investment is tax-deductible, so you can reduce the amount of taxes you pay while working. However, you will be taxed on the money you withdraw during retirement. When you open a Roth IRA, you'll continue to pay taxes on your full income and receive the benefit of tax-free withdrawals. Tax-free withdrawals are subject to some limitations, but many people are easily eligible for it. Many people prefer Roth accounts because they assume they’ll be in higher tax brackets during retirement.

Differences during Distribution
Roth and traditional IRAs also differ when it comes time for your money to be distributed. When you open a traditional IRA, you'll be required to receive distributions from your account once you reach the age of 70 1/2. You will also no longer be allowed to contribute money to it. Roth IRAs, however, generally have no age limits for further contributions or withdrawals. Of course, whether you have a Roth or traditional IRA, you won’t be allowed to make a withdrawal without penalty prior to reaching the age of 59 1/2.

Comparing Contribution Rules
You'll find some similarities between Roth and traditional IRAs in their regulations regarding contribution limits. There are set limitations on the amount you can contribute to your IRA, no matter which type it is. If you want to have one of each type of account, you generally have to split the contribution amount between the two accounts. While this strategy has some benefits (as you'll earn some tax benefits initially and some during retirement), there are often extra costs associated with having multiple IRA accounts. Some banks and financial service providers charge maintenance fees for each account, so you could end up paying more you would with a single account.

Choosing the Best IRA for Your Financial Future
Many people choose traditional IRAs so that more of their income will be tax-deductible, as this is a good way to save in the short-term. If you think you might be in a lower tax bracket during retirement, you could save by earning your tax benefits now and paying taxes on your withdrawals later. However, if you believe your family will be positioned in a higher bracket during your retirement, you could benefit more from the tax-free withdrawals offered by Roth IRA. When it's time to choose an IRA, you can benefit by consulting a financial adviser. Still, your personal financial situation will always be the most important factor to consider. Both the traditional and Roth IRA offer many benefits, and both are great ways to begin saving for your future.

Victoria Lee is an experienced author with a special interest in finance. Based in New York, she gives advice on investing your money and the benefits of a Roth IRA account. Her favorite pastime is reading up on the latest finance news and she saves her best tips for her finance information pages: http://www.squidoo.com/lensmasters/FinancialTips4U at Squidoo.