Are you currently investing for your retirement? Perhaps you have a company 401(k) or 403(b), or maybe you’ve been able to invest in a Roth IRA. We all know that we’re supposed to be investing in our future, so we either take a look at what our company provides or what our friends suggest, but most of us really don’t do the research to find out what all of these retirement accounts are all about. At this moment, could you tell me the difference between a Roth IRA and a Traditional IRA?
The Traditional IRA
The 401(k), 403(b), and the Traditional IRA are basically all the same. Sometimes the maximum contributions vary, but these funds are all invested with pre-tax dollars. In other words, your contributions into this fund are not taxed by the state or federal governments. They are inserted into the fund and will be taxed when you remove the money in your retirement years.
The Roth IRA
This retirement account varies greatly from the others. Instead of paying the tax in your retirement years, the tax is paid before it’s even deposited into the account. Also, this account is often more flexible when it comes to removing money – there are instances where you can withdraw money early, and also, many of the accounts allow you to keep your money in the fund for as long as you want, rather than the typical forced withdraw at age 70 1/2 in the Traditional IRA. It is a more personal approach to pensions, similar to a SIPP pension scheme in the UK.
The chart pretty much says it all, but for those of you that like to see the numbers, here you go!
As you can see between the table and the graph, it absolutely does not matter whether you invest in a Roth IRA or a Traditional IRA. As long as the tax rate stays the same between now and your retirement years, your investment dollars will come out looking exactly the same!
Where are you currently investing your money for retirement? Do you wish that you had money in a different type of account?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.