If you’re in the early stages of your career, you probably don’t think much about retirement. Regardless, it’s never too early to start preparing for it, because time can be your most cherished asset. So maybe you should consider retirement savings vehicles, one of which is the IRA. Depending on your income, you may have a choice between a traditional IRA and a Roth IRA. What is better for you?
There is no one right answer for everyone. But the more you know about two IRAs, the more confident you will be in choosing one.
First of all, the IRA shares some similarities. You can finance any of the many types of investments – stocks, bonds, mutual funds and so on. And the contribution limit is the same – you can invest up to $ 6,000 a year. (Those over the age of 50 can invest an additional $ 1,000.) If you earn more than a certain amount, your ability to contribute to the Roth IRA is reduced. In 2021, you can invest a full $ 6,000 if your modified adjusted gross income (MAGI) is less than $ 125,000 and if you are single, or $ 198,000 if you are married and register together. The amount you can contribute gradually decreases and is eventually limited to higher income levels.
But the two IRAs differ greatly in the way they are taxed. Traditional IRA contributions are usually tax deductible (subject to income limitation), and any earnings growth is deferred by tax, and taxes are owed when you withdraw money. With a Roth IRA, your contributions can never be tax deductible – instead, you contribute in dollars after tax. Any increase in earnings is tax-free when it is withdrawn, provided you have your account for at least five years and do not make payments until you reach at least 59½.