So you are thinking about your retirement plan, retirement savings, and what retirement account to open.
Congratulations to you!
You have already taken step one in a retirement plan: thinking about investing your money for your future and doing research by coming to FundsSavvy.com.
When it comes to saving for retirement, there are a lot of options to choose from. Two of the most popular are the Traditional and Roth IRAs.
So, which is better? In this blog post, we will discuss the difference between Traditional and Roth IRAs and help you decide which is best for you!
What is the Difference Between a Roth IRA and Traditional IRA?
The biggest difference between Traditional and Roth IRAs ...
The biggest difference between Traditional and Roth IRAs is how these retirement accounts are taxed.
When you contribute to a Traditional IRA, you contribute pre-tax dollars, which means that your contribution is deducted from your taxes. For example, if you make $50,000 per year and contribute $5000 to your Traditional IRA, you will only be taxed on $45,000.
With a Roth IRA, you contribute post-tax dollars, which means that your contribution is not deducted from your taxes. For example, if you make $50,000 per year and contribute $5000 to your Roth IRA, you will be taxed on the full $50,000.
Is the Roth IRA or Traditional IRA Right For Me?When deciding on Roth IRA vs.Traditional IRA, you need to consider your unique situation.
If you think that you will be in a higher tax bracket when you retire, then the Roth IRA may be better for you because you will not have to pay taxes on your withdrawals.
On the other hand, if you think that you will be in a lower tax bracket when you retire, then the Traditional IRA may be better for you because your withdrawals will be taxed at a lower rate.
What are Some of the Pros and Cons of Each Type of IRA?
Should You Open a Solo IRA if You Are Not Provided A Retirement Account By an Employer?
If you are self-employed or do not have access to an employer-sponsored retirement plan, you may be wondering if you should open a Solo IRA.
The answer is yes! A Solo IRA is a great way to save for retirement.
There are two main types of Solo IRAs: the Traditional IRA and the Roth IRA. We discussed the difference between these two types of IRAs earlier in this blog post. The biggest difference is how they are taxed.
What to Know About Opening a Solo IRA
You're saving, tax free! Good for you.
However, you need to make this money work for you.
You need to choose how to invest the funds.
There are two main types of investments: stocks and bonds. Stocks are more volatile, which means that they can go up and down in value. Bonds are less volatile, which means that they tend to maintain their value.
When you are choosing how to invest your IRA funds, you need to think about your risk tolerance. Are you willing to take on more risk in exchange for the potential of higher returns? Or would you prefer to play it safe and invest in bonds?
Mutual funds are a collection of different stocks and bonds that are managed by a team of professionals.
In general, you should start by investing in a mutual fund that is aligned with your risk tolerance.
If you are willing to take on more risk, you may want to invest in a stock mutual fund.
If you would prefer to play it safe, you may want to invest in a bond mutual fund.
Investing in a mutual fund is a good way to get started investing because you don't have to pick and choose individual stocks and bonds.
Where Should I Open My Roth IRA or Traditional IRA Account?
Once you have decided how to invest your IRA funds, you need to choose an investment company. There are many different companies out there, so it is important to do your research. You want to find a company that has low fees and a good track record.
Some of the more popular companies where you can open an IRA are :
Vanguard is a popular choice for investors because they have low fees.
Fidelity is another popular choice for investors because they have a wide variety of investment options.
Charles Schwab is a popular choice for investors who are looking for personal help with their investments.
Investors who are comfortable making their own investment decisions seem to gravitate towards TD Ameritrade.
Call the different brokerages. Ask questions. Get a feel for them.
Go in person to a brokerage office if you like.
Decide which is best for you. What is best for your parents or best friend, may not be the best choice for you.
That is OK. You will be the one making contributions, paying any fees, and taking out earnings when the time comes.
Once You Have DecidedOnce your account is open, you can start investing!
When Do You Start Withdrawing Funds From Your Traditional IRA or Roth IRA?When you are ready to retire, you will need to start taking withdrawals from your IRA.
You can start withdrawing funds from your Traditional IRA at age 59 ½ .
You will be required to take Required Minimum Distributions (RMDs) from your Traditional IRA starting at age 72 .
You can withdraw funds from your Roth IRA at any time, but you will only be able to withdraw your contributions, not your earnings.
If you need to take a withdrawal before you reach retirement age, there may be penalties.
How Much Should I Contribute to My Roth IRA or Traditional IRA?Making a budget should include paying yourself first and prioritizing saving. After an emergency fund, saving for retirement should be top priority.
You want to have at least three months of expenses saved in an emergency fund. Once you have that peace of mind, focus on your investing.
It is important to consult with a financial advisor to make sure you are taking the right steps to fund your retirement. What you want to contribute, and how you want to invest your IRA funds is a personal decision.
There is no one-size-fits-all answer to the question of which IRA is best for you. It depends on your individual circumstances. If you are not sure which IRA is right for you, consult with a financial advisor. They will be able to help you figure out which IRA will give you the most benefits
There are many different factors to consider when you are trying to decide which type of IRA is best for you. It is important to think about your tax situation, how much tax free money you want to invest now vs. later, and your domestic situation.
Are you married filing jointly, married filing separately, in a domestic partnership, or single head of household?
Are you planning for a family retirement or individual retirement?
Whatever the case, if there is a spouse or another person involved in your financial situation, it is important to discuss any financial decisions.
Once you have chosen a company, you will need to open an account and transfer your Roth IRA or Traditional IRA funds.
You can do this by going to the company's website and following the instructions.
If you need additional brokerage services, contact your new brokerage and ask as many questions as you need to.
Take The Wheel on Your Financial Future
You are the customer giving this company your hard earned money. Do not be afraid to inquire about your Roth or Traditional IRA, tax benefits, contribution limit, or any other questions you may have about this new account.
None of your questions are stupid. It's your money. Ask away.
If you are a first time investor, don't let that scare you.
You are just as important as as the brokerage's biggest client, because guess what: this is your financial future.
If you don't stay on top of it, no one will.
Happy retirement planning!