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.
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