By Katherine Lordi Want to become a millionaire someday 💲📈? Two major ways to invest your money to build wealth are two Individual Retirement Accounts: TRADITIONAL IRA and ROTH IRA. You can open just one or both!
In life, we all have to pay TAXES eventually. Both accounts provide TAX ADVANTAGES while growing your money, but the biggest differences are 1. which you qualify for based on your income and 2. how and when you get a tax break.
You can open a traditional IRA and Roth IRA at any age as long as you make money from a job or self-employment. If you are below 18, you may need your parent or guardian's help.
To qualify for a Roth IRA, you must make less than $140,000 per year before taxes. On the other hand, there is no income limit for a Traditional IRA! However, these differences influence tax breaks.
For both traditional and Roth IRAs, you can contribute up to $6,000 per year if you are under the age of 50, and you can add money anytime. If you decide to open up both accounts, you can, but the limit is $6,000 combined!
The rules for withdrawing money differ for Traditional IRAs and Roth IRAs.
Let's start with early withdrawals. For traditional IRAs, early withdrawals before the age of 59½ are taxed as income and usually have a 10% penalty. Similarly, withdrawals from a Roth IRA may have some taxes and penalties on earnings depending on what you use the money for.
Now, let's move onto regular withdrawls after the age 59½. For a traditional IRA, these withdrawals are taxed at your retirement tax rate. On the other hand for Roth IRAs, if you have been contributing money for 5+ years, withdrawals are 100% tax-free, penalty-free, and can be taken out anytime!
When you contribute to a Roth IRA, you still have to pay taxes on that money. However, you pay no taxes on money you withdraw during retirement! This makes sense if you expect to pay more taxes in retirement than you do now.
When you contribute to a traditional IRA, you get an upfront tax break, meaning that you pay less taxes for that year. However, you'll pay income taxes on withdrawls during retirement. This makes sense if you have pretty high income (and may not qualify for a Roth) and expect to pay less taxes in retirement.
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