Roth IRA Vs Traditional IRA - The Differences

If you are starting to plan for your financial future, whether you are 20 years old or 50 years old, you are probably being bombarded with all the different financial plans. Sure, you can plan through savings, investments, stocks and bonds, among other things, but the sure-fire way to save for the future is to open an IRA. IRAs were introduced in 1982 and began with just a traditional IRA. Since then IRA plans have branched out to include four more types of financial plans, including the very popular Roth IRA, which has even surpassed the traditional format in usefulness. But what are the main differences you see when comparing a Roth IRA vs traditional IRA accounts? If you find out you are eligible for both plans, which should you choose?

The common advice is to choose the Roth IRA because it gives you so many more useful and flexible options. Traditional IRAs are helpful but many people feel that they are too restricting. Of course, with a Roth IRA you will have to give up a few tax breaks but if you can afford to do this here are a few of the ways it will benefit you:

  • You are not ordered to have mandatory distributions when you reach the maximum age of 70 1/2 like you would with a traditional IRA.
  • You can withdraw any and all of your deposits at any point in time no matter what and with no tax! This flexibility is important because if anything comes up in your life where you need cash and you need it fast, Roth IRAs will bring it to you.
However, all this is not to say that traditional IRAs are useless and old fashioned. Sure, they are a bit older but they still work well for people in certain circumstances. Here are a few instances you would choose a traditional IRA over a Roth account:
  • If you need the tax deduction immediately. By throwing some of your annual income into your IRA you can count it as tax deductible, which will give you more disposable income.
  • If you think you will pay fewer taxes and at a lower rate once you hit retirement age. If you are looking ahead and see yourself moving to a lower tax area or find yourself doing different, less paying work after retirement you may want to consider the tax benefits a traditional account offers.
Whichever account you decide to open you can have the comfort of knowing you are taking the next step in preparing for the future. Many people start too late in their financial preparation, figuring Social Security will help them along. If you want to take full financial responsibility for you, you will open an IRA today!