Traditional IRA vs ROTH IRA (Comparison)
There are some similarities and some differences between Traditional IRA and ROTH IRA. Here are the some important differences between them.
|Traditional IRA||Roth IRA|
|Contribution is tax deductible with criteria.||Contribution is NOT t ax deductible.|
|Contribution is before tax money.||Contribution is after tax money.|
|Tax is deferred, not eliminated.||Tax is already cut before contribution.|
|There is tax & penalty on withdrawal before age 59 1/2 yrs.||Contribution (not earnings) can be taken out any time, no tax/no penalty.|
|After retirement (59 1/2yrs), withdrawals (contribution & earnings) are taxed.||After retirement, withdrawals (contribution & earnings) are tax FREE!!|
|Either extra money gets invested or extra money in hand immediately.||Extra money nothing but tax goes to Uncle Sam (IRS) immediately.|
Which IRA to choose? Which IRA is better?
There is no easy answer. Choosing between Traditional IRA and ROTH IRA completely depends upon several of factors like
- Age (i.e. time between now & retirement)
- Your income & expenses.
- Tax bracket now & after retirement.
- Returns i.e. earnings on your contributions.
long run ROTH IRA beats Traditional IRA. Why?
Assuming you get 10% avg return on your roth ira investment, it is better to go for ROTH IRA. Longer the money in ROTH IRA, more time for earnings to grow. So eventually your earnings (gains/interest) will be far more than your actual contribution. And real gem of roth is, earnings are TAX FREE after 59 1/2 yrs!!
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