Pros And Cons Of A Traditional IRA And Roth IRA

IRA & Roth IRA
The following essay will discuss and explain what constitutes a traditional IRA and a Roth IRA. The essay will discuss the pros/cons of a traditional IRA, pros/cons of a Roth IRA, and summarize similarities and differences between the two types.
A traditional Individual Retirement Account (IRA) “is a way to save for retirement that gives you a tax advantage…” (www.irs.gov, 2016). It is a retirement account [401(k)] that an investor is able to make contributions to, similar to a savings and checking account. Once money is added into the IRA, an individual can invest the funds into different investment vehicles; such as: stocks, bonds, mutual funds, etc. With regards to tax advantages, the individual who opened the account will

have special tax benefits, in which contributions are tax deferred (i.e., taxes are applied later). On the other hand, if the individual wanted to withdraw the money before retirement, there would be a penalty of “10% additional tax [applied,] if you withdraw or use IRA assets before you are age 59½” (www.irs.gov, 2016). Since the money is being put into the IRA before tax, only after you withdraw it (i.e., at 59½), then the amount is taxed.
To continue, a Roth IRA works in a similar fashion, however, contributions are made after you pay taxes on them. Although taxes are paid up front, an advantage to the Roth IRA is that it never gets taxed again. However, to establish a Roth IRA, your eligibility depends on your income. Nonetheless, once an account is opened, it can be maintained indefinitely with no required minimum distribution (RMD). Lastly, contributions may continue to be made once the “taxpayer is past the age of 70½, as long as he or she has earned income” (www.investopedia.com, 2016).
In conclusion, the traditional IRA and Roth IRA hold some similarities, however, differ based on their tax advantages. The traditional IRA is tax deferred for the duration of the investment, whereas a Roth IRA is tax free, due to the fact that the investment considers the after-tax contribution. With this information, it can be concluded that traditional IRAs may have a large benefit if future taxes are predicted to be lower (i.e., low tax at the time of withdrawal), with the Roth IRA benefiting if future taxes are higher (i.e., paying low taxes today as opposed to more tax later). Although both share similarities, depending on a specific situation, their differences will allow the investor to make a smart decision of how they want to invest their money.