Which retirement accounts is right for you in United States? (Roth IRA or Traditional IRA)
IRA (Individual retirement accounts) are a key part of long term savings and investment. But before you open the account, you first need to understand which retirement accounts is benefit for you. Each IRA have its own advantages and disadvantages.
Roth IRA – It is a special type of retirement account in which you pay taxes on money going into your IRA Account, but the withdrawals in retirement are tax free.
In 2021, the limit for singles is $140,000 and for married couples, the limit is $208,000.
Traditional IRA – In this type of retirement account, you deduct contributions now and pay taxes on withdrawals later.
Anyone with earned income can contribute, but tax deductibility is based on income limits and participation in an employer plan.
|Basis of Comparison||Roth IRA||Traditional IRA|
|Contributions||No tax deduction in year of contribution.||Contribution is tax deductible in year made.|
|Accumulation||Tax deferral on all earnings (no tax while money is inside the account)||Tax deferral on all earnings (no tax while money is inside the account)|
|Penalty||Withdraw contributions penalty-free||10% Penalty on early withdrawals|
|Distribution||Distributions are tax free||Distributions are fully taxed as ordinary income.|
The total annual contribution limit are the same for both Roth and Traditional IRA in 2021 is $6,000 or $7,000 if you’re 50 or older.
If you think the tax rate will higher at retirement than choose Roth IRA and if the tax rate will lower at retirement than better to opt for Traditional IRA.