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Roth IRA versus a Traditional IRA

Tax time is coming and this is the time of year when many individuals consider putting money in their IRA. Here we consider the virtues of a Roth IRA versus a traditional IRA. In either case putting money aside for retirement is a good idea. Managing that money while it is in a Roth IRA versus a traditional IRA is very important. And deciding up front on a Roth IRA versus a traditional IRA may take a little thinking. Here is a brief rundown of the differences between a Roth IRA versus a traditional IRA.

Roth IRA versus a Traditional IRA

A Roth IRA is a specific type of individual retirement account. United States tax law allows individuals to put aside a set amount of money in such an account. The money is first taxed. However, if the terms of the Roth IRA are met the money is not taxed upon withdrawal. On the other hand with a traditional IRA one can put aside a set amount of money for retirement and deduct that amount from ones taxes. But, when one takes money out, usually during retirement, the withdrawals are taxed. The rationale is that a person is not earning a regular income during retirement and as such pays at a lower tax rate and perhaps pays no taxes at all. If you invest in dividend stocks you will pay taxes on the dividend when your income is lower if you have a traditional IRA and you will not pay at all if you follow the rules of a Roth IRA. As always seek expert advice and read the fine print before investing in a Roth IRA versus a traditional IRA.

What Can You Invest in with a Roth IRA versus a Traditional IRA?

In general one can invest IRA assets in common stocks, bonds, mutual funds, bank certificates of deposit, or real estate. All such investments through a Roth IRA versus a traditional IRA must meet the specific requirements of the Internal Revenue Service. As a rule there are more types of investments that can be made in a Roth IRA than in other types of tax advantaged retirement plans such as pensions, profit sharing accounts, 401Ks, etc. What is available may depend on the trustee of the account. For example, a bank may only offer CDs. A stock broker may only offer stocks. And, mutual funds will obviously only offer mutual funds.

How Much Can I Invest in an IRA?

The IRS limits how much you can put in an IRA. It has to be the smaller amount of your taxable compensation and the limit amounts listed below for 2013 to 2014.

Age Related Limit to IRA Investment, 2013-2014
Age 49 and Below Age 50 and Above
$5,500 $6,500

IRA Investments Are Still Investments

When you make your decision regarding a Roth IRA versus a traditional IRA you still need to do your fundamental analysis of the investment. There is no protection against bad judgment just because your money has a tax advantaged status. Beware of investing in gold through your IRA. The shiny stuff is headed down. On the other hand, if you believe that over the long term gold might recover it might be a good idea to buy stock in a gold ETF with a Roth IRA versus a traditional IRA and hold for the long term.

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