Individual Retirement Accounts allow the gains
from growth on the funds deposited and invested to grow free from
taxation. There are two different type of IRAs normally available to
employed individuals and their spouses.
Distinctions
Traditional IRAs: This type of account
allows you to fund the account (make deposits) with before-tax dollars.
This is accomplished by providing you with an earnings reduction allowance
when you compute and file your annual income taxes. All withdrawals of
both deposits and investment gains are subject to taxation at your
ordinary income tax rates. You must start taking withdrawals by April 15
of the year after you turn 70½ years of age.
Roth IRA: This type of account allows you
to fund the account (make deposits) with after-tax dollars. All
withdrawals of both deposits and investment gains are not subject to any
taxation. You are not required to take withdrawals at any time.
Note the distinctive element of the Roth IRA.
The investment gains are never taxed.
Issues
The obvious question is which one is best? The
determining factor is from what source will most of the funds in your
account come? This is a function of how long the funds are invested in
your account. If more of the eventual value in your account will come from
your deposits, then the Traditional IRA probably will prove to be the
better alternative. If more of the eventual value will come from the
investment gains on your deposits, then the Roth IRA probably will prove
to be the better alternative.
Strategy
Recognizing the issues discussed above, it is a
general strategy that the Roth IRA is the better strategy for those 40
years of age or less. The Traditional IRA is the better strategy for those
over age 40 years.
We recommend that you discuss your situation with
a licensed tax professional before making any decisions.
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