Today we have a guest post from Miles Young. Miles is a freelance writer who writes about travel, finance, and bugeting…
Many people choose to put their money in a traditional IRA because they don’t want to pay taxes on the money they contribute.
For 2013, anyone under 50 can contribute $5,500 (those over 50 can contribute $6,500). Since this money is pre-tax, it can help you in two important ways.
First, it could help you save money on taxes by keeping you in a lower tax bracket. A couple that reports $217,450 in taxable income pays a 28 percent federal tax rate. Once the couple crosses that threshold, even by a dollar, the rate jumps to 33 percent. If a couple earns $222,950, but puts $5,500 of that money into a traditional IRA, they would keep their tax rate at 28 percent instead of jumping to 33 percent.
Second, avoiding taxes on IRA contributions means you have more money in your account. Since money grows exponentially, this can help you earn considerably more money. You do, however, have to pay some taxes when you take money out of the account.
Benefits of a Roth IRA
Discover Bank Roth IRA’s and accounts from other institutions do not give you immediate tax advantages. You have the same contribution limits, but you will pay taxes on the money just as you do every other dollar that you earn.
The big advantage comes when you withdraw money from the account. As long as you withdraw the money after you have turned 59.5 years old, you don’t pay any taxes on it. That includes your earnings as well as the money you originally put into the account.
If you expect to have a lower tax rate after retirement, then this is probably the best type of account for you.
Advantages of a Designated Roth Account
Only those who participate in a 401(k), 403(b), or 457 can contribute money to a designated Roth account. The big advantage of this retirement option is that one can contribute up to $17,000 per year ($22,500 for those 50 and older).
Although contributors have to pay taxes on the money they put in their designated Roth accounts, they avoid taxes when they withdraw money for qualified distributions.
Choosing the Best Option for You
The kind of IRA account that you choose should depend on factors including:
- How much income you earn
- Whether you have a retirement account through work
- Whether you expect to pay higher or lower taxes after retirement
- The kind of lifestyle you plan to enjoy after retirement
Since these factors can change throughout a person’s life, it makes sense to get advice from a qualified professional.
Now that you know more about IRA accounts, which one interests you most?