When it comes to retirement, it’s best to start saving as much as you can as soon as you can. If you don’t have a full time job set up with a 401k account, then the next best thing you can do is open your own retirement account such as a Roth or traditional IRA.
What’s the difference?
- The main difference between the two comes down to taxes.
- Traditional IRA offers an initial tax break
- Contributions are taxed income
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A Roth IRA is an individually managed retirement account. That means you get to contribute your income to the account and don’t need an employer to open the account for you. Up to $6,000 per year can be contributed towards your account.
Contributions will come from taxed income. You can make tax-free withdrawals under certain conditions. What does that mean exactly? That means that when you receive your paycheck, you can allocate however much money you’d like to contribute and it has already been taxed.
This is different from how a 401k operates. A 401k will deduct your contribution from your paycheck prior to taxes.
A Roth IRA is a good choice for a first time saver and for someone making under $139,000 a year. This is the type of retirement account I have and it’s easy enough to manage!
- A Roth IRA is taxed initially
- Contributions of up to $6,000 per year
- Good for first time investment account
- Individuals making under $139,000 qualify
- Non-taxed deductions on certain terms
With a traditional IRA, the concept is the same regarding the individual retirement account. You won’t be taxed on the income you contribute, however an early withdrawal will be taxed heavily. Early withdrawals can lead to an up to 10% tax penalty.
There is no limit on how much you can contribute per year. A traditional IRA is typically a better option for someone in a higher income bracket.
- No contribution limits
- Tax deferred contributions
- Better for higher earning individuals
So what is the better option overall? It is going to be up to you, however if you are a lower income earner as are most entry level graduates, then a Roth IRA is the way to go. The traditional IRA suits someone who has an income over $100,000 annually.
Whichever route you decide, it is never too early to start saving for retirement. Even if you can only manage $10 a month initially, it’s better than nothing.
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