You may be wondering which type of IRA that you should open. There are advantages to both types of IRAs. There are also disadvantages to both types of IRAs.
Advantages of a Traditional IRA
- Contributions are tax-free
- Lowers taxable income
- Earnings grow tax-free, but they are taxed when you withdraw the money
- Protects money for retirement by having early withdrawal penalties
Disadvantages of Traditional IRA
- Withdrawals are taxed
- Contribution limit of $5000.00 a year
Advantages of Roth IRA
- Withdrawals are tax-free
- Earnings grow tax-free and are not taxed when you withdraw the money
- Protects money for retirement by having early withdrawal penalties
Disadvantages of Roth IRA
- Contributions are made with after tax dollars
- Does not lower your taxable income
- Contribution limit of $5000.00 a year
The easiest answer is to simply look at which one you will have to pay the most taxes on. For a Roth IRA you will only have to pay taxes on your contributions. When you make withdrawals you will not be taxed on the earnings. However if you open a traditional IRA you will have to pay taxes on the money when you make a withdrawal. This means that you will have to pay taxes on your earnings, which will be a greater amount than your contributions.
You should talk to your accountant or financial advisor to make sure that this choice really is the right one for you. If you feel you need the tax deduction consider looking for other deductions or other ways to lower your taxable income. It is important to take a long-term view when you consider the best IRA to open.
