Roth IRA vs. Traditional IRA: Which Is Right for You?

It is never too early to start saving to achieve your retirement dream. One of the best ways to do that is by opening an Individual Retirement Account (IRA). An IRA is a savings account with unique tax benefits, which can help you save more money for your retirement.

What Is a Traditional IRA

Traditional IRAs are the most common type of retirement savings account. IRAs are more than just a savings account, giving you the option to invest in mutual funds, individual stocks, and even precious metals and grow your money tax-deferred. As of mid-2020, nearly 29% of U.S. households held a Traditional IRA.

What Is a Roth IRA

Contributions to a Roth IRA are made with after-tax dollars, meaning you have already paid taxes on the money you contribute. Over 26 million households owned a Roth IRA in 2020, which represents about 20% of IRA holders in America.

What Are the Contribution and Tax Deduction Limit

You can contribute to an IRA if you have taxable income. The Internal Revenue Service (IRS) has set some limits on the amount of money you can invest in IRAs. For 2022, this limit is $6,000 and has been unchanged since 2019. If you are over 50, you can contribute up to $7,000.

Can I Avoid Paying Tax Penalties for Early Withdrawal

The IRS has introduced exception scenarios to avoid paying the 10% penalty tax for early withdrawal from Traditional and Roth IRAs. Some of these qualifying scenarios are described below. Consult the IRS website for more details.

Should I Invest in a Roth IRA or Traditional IRA

This decision comes down to personal preference, a fair guess of what your retirement income will look like, and IRS rules.

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