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Retirement Accounts: Traditional IRA or Roth IRA

The 2016 Tax deadline will soon be approaching come this April 2017 and with that many may have questions about IRAs (Individual Retirement Accounts)

IRAs can be a very intense subject to discuss, but for the blog I will keep it very easy less complicated.

IRAs can be broken down into two basic types, a traditional IRA and a Roth IRA. Little known fact, William Roth, Jr. Senator from Delaware sponsored legislation creating the ROTH IRA, from the Taxpayer Relief Act of 1997.

What sets apart the Roth IRA from the Traditional IRA is that monies deposited into the ROTH are typically already taxed dollars. Therefore when the ROTH account appreciates in value over the years, upon retirement when you access the funds they can be withdrawn tax free (based upon certain guidelines). Having access to tax-free income can be a benefit in your later years providing you with more spendable income for living when you are on a tight budget.

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In discussing the Traditional IRA, they operate the complete opposite when it comes to taxes. Any funds deposited or industry talk ‘contributions” into the traditional IRA are tax deductible. If you contribution $2,500. To your traditional IRA and your total salary was say $25,000.00, you taxable income would drop $2,500 to $22,500. Your taxable basis just stepped lower. Using the same example with a ROTH IRA, if you contribute $2,500 and you make $25,000 annually your tax basis doesn’t change it stays at $25,000.00 There are a few requirements though when you withdraw monies for your retirement, with Traditional IRA you make take distribution at age 70 ½. With the ROTH IRA there is no distribution requirement as long as there are earnings still being made.

Many ask is one better than the other? Well each person’s financial situation is different and that is what determines which account is the best fit for you. Now that the basic understanding has laid on IRA, the step is to determine what type of investment can be placed inside of the IRA.

The most common investment vehicles are mutual funds, but that’s not to say other vehicles like raw land, homes, gold, cash, CDs have also been placed in these type of accounts.Many worker’s who have 401k accounts when they retire from a job or for that fact maybe change jobs, roll the 401((k) account over into an IRA account they setup. They prefer to keep their money under their control rather at the old firm they used to be employed at. It is said that, IRA are the second biggest asset next to homes and 401(k) that the American worker possesses.

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