An IRA, or Individual Retirement Account, is a retirement savings account that can reduce your tax bill — now or in the future.
If you invest in a Roth IRA, you’ll pay taxes on the money you contribute today, but not when you make withdrawals during retirement.
If you invest in a traditional IRA, you’ll save money on taxes today but will pay taxes when you take out money during retirement.
Both a traditional IRA and a Roth IRA have certain income limits and exclusions, so it’s important to figure out which one is best for you.
You have a lot of options when it comes to saving for retirement.
Contributing to a 401(k) is a great starting point, especially if your employer offers a match. But if that’s not an option, or if you want to save even more, you’ll probably find yourself deciding between a traditional and a Roth IRA.
Here’s how to determine which one is better for you.
What is an IRA?
An IRA, or Individual Retirement Account, is an important, tax-advantaged retirement account. You can find an IRA at most major brokerages and banks, including both online and brick-and-mortar financial institutions.
You can save up to $6,000 total in an IRA (either a Roth or a traditional) in 2019 if you’re under 50 years old. If you’re 50 or over, you can save a total of $7,000. This includes a catch-up contribution of $1,000.
An IRA can save you money on taxes while also motivating you to save for retirement. However, the tax treatment of traditional vs. Roth IRAs is different. Before putting thousands of dollars into one of these accounts, you should review the tax implications and consider your expectations for the future to make sure your money goes the right place.
How a traditional IRA works
A traditional IRA used to be the only kind of IRA. Generally, contributions are made on a pre-tax basis, meaning you won’t pay taxes today on the amount you save. It’s similar to how most 401(k) contributions work.
Read more: There are 2 primary types of retirement savings accounts — and people don’t realize you can use both
To better understand what that means, let’s look at an example. Let’s say you make $60,000 per year and contribute $6,000 this year to a traditional …read more
Source:: Business Insider