IRA accounts are a good “first step” in retirement planning. When you invest through a traditional or Roth IRA, you give those invested assets the potential to grow with compounding and you also position yourself for present or future tax savings.
An IRA is an account into which various investments can be placed. It is yours and you control it, as compared to an employer-sponsored retirement account that you lose control over when you leave a job.
IRAs are tax-advantaged. In both Roth and traditional IRAs, account earnings compound with tax deferral until withdrawn – that is, they grow without being taxed. With a traditional IRA, contributions are usually tax-deductible, based on your income, but withdrawals are taxed as ordinary income after age 59 ½. With a Roth IRA, tax-deductible contributions are not permitted, but your earnings can be withdrawn tax-free. That is the main difference between a traditional IRA and Roth IRA. While both give you the chance to build retirement savings with tax advantages, the traditional IRA offers you a sizable tax break today, while the Roth IRA offers you a big tax break tomorrow.
Several variables should be considering when deciding to open a traditional IRA or a Roth IRA. One key question is whether you will be in a lower tax bracket when you retire. If you will be, a traditional IRA might be the better choice. If you have decades to go until retirement and think you will retire to a higher tax bracket than you are in today, then the Roth IRA may be the better option. When considering your options, chat with a financial professional to help you make the final decision. Then again, you could always open one of each!