When you finally start pulling in some money, investing in your retirement may seem like the last thing you want to put it towards. Having a lot of confusing choices like 401(k), Traditional IRA, 403(b), and a host of other options doesn’t make it any easier. Today we’re focusing on the pro’s and con’s of the Roth IRA.
Editor’s Note: As always, you should seek the advice of a professional financial planner before making any decisions about your finances or investing. Richard is not a registered financial adviser, and he offers this based only on his personal experience. What works for him, may not be right for you. This should only be used as a basic introduction, and a leaping off point for further research. Read more here .
Over the last two years with the down economy, everyone is talking about ways to save money. Yes, of course I should spend less! I know that already. But what about retirement? You have options to invest in a 401(k), different types of Individual Retirement Arrangements, stocks, bonds or even a high-yield savings account. But the one that is key to our age bracket is the Roth IRA.
I’ve heard of a Traditional IRA too … what’s the difference?
The Traditional IRA has been around since 1975 and has a bit more history behind it. Not to be confused with the Roth, the Traditional has the same base concepts of saving and investing money for retirement, but the way the government looks at it is completely different. First of all, in most cases with the Traditional IRA, the contributions you make are tax-deductible with your individual return each year. That’s a huge benefit.
At the same time, the Roth has that benefit when you take money out after retirement in that it is tax free. A huge negative (in this writer’s opinion) is that when you withdrawal money from the Traditional account, it is taxed as gross income. The basic difference is when you are taxed, but the long and short of it is that most people, especially young adults should look more at the Roth than the Traditional. Here’s why…
The Roth IRA is an “Individual Retirement Arrangement” which was created by the late Senator William Roth of Delaware back in 1997. These accounts are designed to allow investors purchasing options into securities, common stocks and mutual funds (although other investments can include derivatives, notes, certificates of deposit, and real estate).
The basic premise behind the Roth IRA is that it is an easy way to build retirement money, tax-free. (Disclaimer: I have had various and multiple Roth IRA accounts since 2002.) Unlike a 401(k), which is a company sponsored account where you invest money pre-tax, meaning your company takes the money before you even see it, the Roth on the other hand is money that you get (or have) and you decide to invest it on your own, therefore it has already been taxed. So when you ...