Two major types of Individual Retirement Accounts (IRA) are the traditional IRA and the Roth IRA. The primary difference between the two is how they are taxed. With a traditional IRA, you contribute money on a pre-tax basis, which means that your contributions are deducted from your taxable income. This results in lower taxes today, but you will be taxed on the money when you withdraw it in retirement. With a Roth IRA, you contribute money that has already been taxed, so you have not taxed again when you withdraw the money in retirement.
Another difference between the two types of IRAs is that with a traditional IRA, you may be eligible for a tax deduction on your contributions. With a Roth IRA, there is no up-front tax deduction, but your withdrawals in retirement are completely tax-free.
Roth IRAs also have some other advantages over traditional IRAs. For example, you are not required to take mandatory distributions from a Roth IRA at age 70 like you are with a traditional one. This means that you can leave the money in your Roth IRA to grow tax-free for as long as you want. This particularly helps if you plan on investing with noble gold or similar precious metals firms as you can leave your investment be until the value of the concerned metals reaches your desired threshold.
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That being said, if you have a traditional IRA, you may be required to take minimum distributions starting at age 70. However, with a Roth IRA, there are no minimum distribution requirements, so you can leave the money in your account to grow tax-free for as long as you want.
An important tip, regardless of the type of IRA you choose, it is essential to have a proper understanding of the terms associated with IRAs. Some common terms include contribution, a partial rollover, withdrawal, backdoor Roth IRA, and custodian. Familiarizing yourself with these terms will enable you to make informed decisions regarding your IRA and better comprehend any advice provided by your financial planner.
How to open a Traditional IRA account
You can open a traditional IRA at most banks, brokerages, and financial institutions. To do so, you’ll need to have earned income from a job or business (self-employment income doesn’t qualify). Once you have that income, you can start contributing up to the annual limit of $6,000 for 2019 ($5,500 if you’re under 50).
Keep in mind that you may not be able to deduct all of your traditional IRA contributions if a retirement plan covers you or your spouse at work and your income exceeds certain limits. If you’re not sure whether you can deduct your traditional IRA contributions, you can use the IRS’s Traditional IRA Deduction Worksheet to find out.
How to open a Roth IRA account
You can open a Roth IRA at most banks, brokerages, and financial institutions. To do so, you’ll need to have earned income from a job or business (self-employment income doesn’t qualify). Once you have that income, you can start contributing up to the annual limit of $6,000 for 2019 ($5,500 if you’re under 50).
Keep in mind that you may not be able to contribute the full amount to a Roth IRA if your income exceeds certain limits. If you’re unsure whether you can contribute the full amount to a Roth IRA, you can use the IRS’s Roth IRA Contribution Limits Worksheet to find out.
Which type of IRA account is right for you?
The type of IRA account right for you will depend on your circumstances. Be sure to consult with a financial advisor to see which one is right for you and your retirement goals.
As you plan for your retirement, it’s important to think about the type of lifestyle you envision for your later years. Many retirees enjoy the freedom to travel more or pursue long-time hobbies. It’s wise to save and invest sufficiently to afford the retirement activities you desire.
At some point, you may also consider your future housing needs. Will you want to downsize or move closer to family? You might also want to explore senior living communities, like the ones you see at https://www.simpsonsenior.org/, which offer various types of care and amenities. These range from independent living apartments to assisted living to nursing homes. Prices span from affordable to quite costly depending on services, room type, and location.
When considering your future housing needs, it is important to factor in the financial implications. This is where the right type of IRA account can play a crucial role in providing the necessary funds for your desired retirement lifestyle and potential housing expenses.
Consulting with a financial advisor can help you determine which IRA account is best suited to your individual circumstances and retirement goals.
