Roth IRA vs. Traditional IRA
There are distinct differences between a Roth IRA and a Traditional IRA. Sheldon Harber, President of Asset Strategies, Inc., explains what they are.
Q: What is a Roth IRA?
Sheldon: A Roth IRA is a tax-deferred retirement plan that money in the Roth IRA plan compounds tax free. When you make distributions (payments) from it, those distributions are not taxed. You are eligible to receive Roth IRA distributions at 59-and-a-half years old to begin receiving distributions from a Roth IRA and you must also have been investing in one for at least five taxable years.
Q: What’s the disadvantage of a Roth IRA?
Sheldon: The only disadvantages I can think of for a Roth IRA has to do with what we call Required Minimum Distributions. The government says when you turn 70-and-a-half years old, you must take a minimum each year from the account.
Another disadvantage is that you are limited what you can contribute. Right now, you can contribute up to $5,000 a year. If you’re 50 and older, you can contribute an extra $1,000. It’s called a “catch up”.
Q: Can you explain the required distribution in a traditional IRA starting at age 70-and-a-half (years old) and the scale in which it is paid out?
Sheldon: Oh yes, this is a fun one. The government says that on April 1 following the year when you turn 70-and-a-half years old, you must begin to take out money from your traditional IRA which is taxed as ordinary income. Each year there is a calculation based on the amount in the account the previous December 31st and your age.
Q: As we talked about in a previous article, the value of money, compare a Roth IRA to a traditional IRA.
A: In a way, the Roth IRA and a traditional IRA are polar opposite because the traditional IRA allows for tax deductions of that contribution, which is $5,000 a year, or $6,000 if you’re older than 50. On the other hand, when you go to take the money out of a Roth IRA, it’s not taxable and the traditional IRA’s are.
Investors should carefully consider the investment objectives, risks, fees and expenses before investing. For this and other important information please obtain the investment company fund prospectus and disclosure documents from your Rep/Advisor. Read this information carefully before investing. Diversification and asset allocation strategies do not assure profit or protect against loss.
You’re best served by an experienced financial and tax professional. Asset Strategies, Inc. has been serving clients for over 60 years.
Be sure to also follow us at these sites:
Asset Strategies, Inc. at Twitter
Asset Strategies, Inc. at Google +
Asset Strategies, Inc. at YouTube
Scott Simon
12:19 pm on Thursday, September 20, 2012
I'm always amazed at people who rely solely on company pensions and criticize privately-funded options like IRA. When pensions are mismanaged and go bankrupt, they're the loudest to complain about greed when they had options all along to fund their retirment.
flyoverland
12:45 pm on Thursday, September 20, 2012
I have never understood why employees are allowed to contribute to a 401(k) (assuming their company has one) and an IRA, while the self employed, or those who work for companies that don't have 401(k)'s cannot. It really isn't fair that the one group has the chance to save more with tax preferences. Of course, neither is probably going to support you in retirement unless you time it right and are very lucky.
Scott Simon
11:14 am on Friday, September 21, 2012
People who are self-employed or work for companies that don't have of 401(k) can fund their own IRA.
flyoverland
12:19 pm on Friday, September 21, 2012
Yes, I understand and that is the problem. If you work, you can contribute to both. If you don't have a 401k, you are limited to the very puny amounts allowed by the IRA regulations. This means, those who have access to a 401k, which, by the way does not require an employer to match anything, have a legal method to save more with the tax advantages than those who don't. I have always thought that is unfair.