{"id":7382,"date":"2014-02-05T10:06:02","date_gmt":"2014-02-05T18:06:02","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7382"},"modified":"2016-12-21T07:28:11","modified_gmt":"2016-12-21T15:28:11","slug":"investing-basics-traditional-vs-roth-iras","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/investing-basics-traditional-vs-roth-iras\/","title":{"rendered":"Investing Basics: Traditional vs. Roth IRAs"},"content":{"rendered":"

One of the most confusing aspects of retirement saving is the proliferation of tax-deferred retirement accounts. There are specialized health and education accounts, individual retirement accounts of various flavors, then a wide variety of potential investments to put inside them.<\/p>\n

You can be forgiven if “grocery aisle paralysis” sets in. Too many choices is a real problem, one the retirement industry tends to address by offering even more choices.\u00a0Like a shopper contemplating 15 varieties of toothpaste, we often go with the tried-and-true or simply give up and walk away.<\/p>\n

\"roth<\/a><\/p>\n

Giving up is the problem.\u00a0We don’t save nearly enough<\/a>\u00a0and we don’t save in the smartest possible ways. So here’s a simple breakdown of two major individual retirement account types \u2014 traditional and Roth IRAs.<\/p>\n

They have a lot in common, but they are different in one major way. A traditional IRA is for money you save today in order to delay taxes. A Roth IRA is for money on which you will pay taxes today but wish to use in the future tax-free.<\/p>\n

Both have advantages. Let’s drill down (no pun intended) a little more:<\/p>\n

Traditional IRA:<\/strong>\u00a0You can put aside money today, within certain limits, and avoid paying taxes this year. The advantages are twofold: Your money will grow more since more of it will be\u00a0compounding over a period of years<\/a>.<\/p>\n

You are taxed on the money later at ordinary income rates (not capital gains rates), but only on withdrawals in retirement and probably in a lower tax bracket.\u00a0You are required to make those withdrawals starting at age 70-and-a-half.<\/p>\n

Roth IRA:<\/strong>\u00a0Like with a traditional IRA you put aside money today but cannot deduct the contribution against current-year taxes. It will compound over years in the same way, but the Roth money does so tax-free.<\/p>\n

With a Roth, you pay no income taxes on withdrawals nor capital gains taxes. There are fewer restrictions on timing of withdrawals, too, although high earners are limited in their contributions.<\/p>\n

You might hear an advisor talk about a “rollover IRA.” That’s nothing more than money you take from a past 401(k) plan and put into a traditional IRA.\u00a0You might do that to consolidate your finances into a smaller number of accounts or to make sure that\u00a0your portfolio is managed in a consistent way<\/a>.<\/p>\n

About Roth conversions<\/h2>\n

You could just as easily roll 401(k) money (or other IRA savings) into a Roth IRA. However, you would be taxed on the amount you choose to move at current income rates.<\/p>\n

That might be a good idea if you are young and can recover the tax cost through market appreciation.\u00a0It might not if the tax cost today is significant or if you are a near-retiree. A financial advisor can walk you through the impact of a so-called “Roth conversion.”<\/p>\n

The bottom line is this: Traditional and rollover IRAs are the same thing, a bucket of money you save today that\u00a0lowers current taxes<\/a>. A Roth IRA is there to help you avoid taxes in the future.<\/p>\n","protected":false},"excerpt":{"rendered":"

One of the most confusing aspects of retirement saving is the proliferation of tax-deferred retirement accounts. There are specialized health and education accounts, individual retirement accounts of various flavors, then … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":7383,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[8],"tags":[],"yoast_head":"\nInvesting Basics: Traditional vs. Roth IRAs | MarketRiders<\/title>\n<meta name=\"description\" content=\"Here's a simple breakdown of two major individual retirement account types \u2014 traditional and Roth IRAs.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.marketriders.com\/investing\/investing-basics-traditional-vs-roth-iras\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Investing Basics: Traditional vs. Roth IRAs | MarketRiders\" 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