Most people know that they need to save for retirement, but they don’t know, between Roth IRA and traditional savings, which type of retirement account is best. Comparing your options is a wise decision, so you know the rules that govern these retirement accounts. The main differences are the amount of money people can contribute to their accounts and when they have to pay taxes on their funds.
What is an Individual Retirement Account, or IRA?
Starting with the basics, an IRA account is an investment account you open to save for your retirement. When you retire, you’ll want to have enough money to pay all of your bills and live a comfortable life. To do that, you must save, so then you don’t have to work to earn a living. So another important decision you’ll need to make is how much you should save.
Since you don’t know how long you’re going to live, you probably don’t have any idea of how much money you should save. It’s a tricky question to answer because no one can foretell what will happen in the future. The best solution to the problem is to ensure you have a large amount saved. The nice part about investment accounts is that they mature, with interest or dividend payments to grow your wealth more than if you saved money on your own.
What is a Roth IRA?
A Roth IRA is a specific retirement account in which you pay taxes on the funds you contribute instead of paying taxes on the money you withdraw later. Some people want to be able to withdraw their money when the time comes without paying taxes on it, so the Roth IRA is a better choice for them. However, we all must pay taxes at some point on the funds we have saved. The Roth IRA makes it so we can pay the taxes on our contributions and not on the funds we receive when we need them.
How Much Can You Contribute to These Accounts?
There are laws restricting the amount of money you can contribute to your IRA accounts and early withdrawal of your retirement funds. These laws affect both traditional IRAs and Roth IRAs. As of 2020, the maximum amount you can contribute is $6,000 annually, and an additional $1,000 for those over 50 to catch up on their savings if needed. However, for a Roth IRA, you might not be allowed to contribute as much because of your Modified Adjusted Gross Income, or MAGI, and your tax filing status.
Can You Contribute Regardless of How Much Income You Have?
Your contributions are limited depending on your MAGI if you have a Roth IRA. The income limit amount varies depending on your filing status, married, single, or married but separated. You can contribute as much as you like for traditional IRAs, regardless of how much you earn. The only restriction with traditional IRA contributions is that you may not be able to claim a tax deduction, depending on your income and filing status.
How Am I Going to Be Taxed with a Roth IRA vs. a traditional IRA?
You can find this information for yourself by using one of the various calculators we have available to you on Compound Daily. You can easily input your own monetary values to the calculator and figure out the tax values that you’ll earn or have to pay at some point. In addition, we have other calculators available for free, so you can determine other interest amounts on financing loans or bank accounts you may be interested in.
Depending on the monetary amount you plan to contribute, the length of time the money is in the account, and the type of account, you may be able to make more with the interest accumulation. So it literally pays to do your homework and figure out which account will be best.
Can I Have More Than One IRA?
Yes, you can have both types of retirement accounts. It’s actually recommended to have at least one of each type of retirement account. Having both a pre-tax and a post-tax account will be beneficial to you because they both will accumulate interest over time and can help you split up your current and future taxes. Many people hold both a Roth IRA in addition to the traditional IRA account or their 401(k) retirement account they have through their job.
Now that you know more about the different retirement accounts, you can determine the interest amount and the final amount of money you’ll have with each IRA. With more knowledge, you can make a better decision regarding your money and retirement plans.