IRA Vs Traditional Iras

Saving up for the retirement is one of the most important decision we all should make in our 20s. To do so, we can open an individual retirement account (IRA). IRA is mostly like a saving account, which helps you build your nest egg. The difference of IRA with a saving account is that you can use some tax-advantages while you are saving up for your retirement. “Individual retirement accounts, or IRAs, give people a way to build tax-deferred savings for retirement. An IRA is an account, not an investment” (Bankrate, 2009). There are four types of IRA: Traditional IRA, Roth IRA, SEP IRAs, and SIMPLE IRAs. According to “Roth IRA vs. Traditional IRA: What's the Best Choice for You?” an article by Matthew Frankel the Traditional and Roth IRA are

the two common types of IRA that American use (Frankel, 2017). So, in this paper I will only focusing on Traditional and Roth IRA, since they are the most popular ones among Americans.
Traditional IRA is the “tax-deferred” type of retirement account, which means you pay the tax when you want to withdrawal your money when you retired. “Deferring taxes means all of your dividends, interest payments and capital gains can compound each year without being hindered by taxes - allowing an IRA to grow much faster than a taxable account” (CNN, 2017). There are two different types of Traditional IRA. Deductible, which you deduct your tax from your contribution and get a tax refund at the end of the year, and Non-Deductible, which obviously you cannot deduct your contribution from your tax return (CNN, 2017).
Roth IRA is the type of account that you don’t have to pay any tax at the time you want to withdrawal your money, because you have already paid the tax as you where saving up.

That is why they call the Roth IRA “tax-free”. So, the difference between the Roth IRA and the Traditional IRA is that “Traditional IRAs can delay the taxes until retirement, but with Roth IRAs, you pay tax now rather than later” (CNN, 2017). Logically, Roth IRA should be more beneficial because you pay the tax now and you don’t have to be worry about it when it’s time to use your nest egg. Also, the tax rate will increase over the time, so it would be better to pay it when it’s lower. Another big difference between these two IRAs is the time you are allowed to withdrawal your money. With the Traditional IRA you must start withdrawing from your account by the time you are 70 versus the Roth IRA that allows you to leave your money in your account as long as you want or you can take it out any time you want (CNN, 2017). The similarities is that you have to pay the tax on your IRAs anyway, and it doesn’t matter which type of account you have, none of them is actually “tax-free”, and you have to pay the tax at some point.

Considering the points I’ve mentioned above, Roth IRA seems to be a better choice, but there are certain requirements that have to be met before a person can contribute to Roth IRA. According to CNN, “you must have a taxable income and your modified adjusted gross income is

either:
• Less than $194,000 (phasing out from $184,000) if you are married filing jointly.
• Less than $132,000 (phasing out from $117,000) if you are single, head of household, or married filing separately (if you did not live with your spouse at any time during the previous year).
• Less than $10,000 if you're married filing separately and you lived with your spouse at any time during the previous year” (CNN, 2017).
So, if a person falls into these categories Roth IRA would be a perfect choice for them, otherwise they can start with a Traditional IRA and later on they can switch it to Roth IRA. Traditional IRA has its limits too. As I mentioned in the beginning there are other IRA types that falls under the Traditional IRA. The SEP and Simple IRAs, and those who can’t use Traditional IRA can at least use one of these two until their income meets the limit requirements. These two are mostly for self-employees and business owners who have at least 21 years old.