Difference between IRA and Roth IRA

Want to start putting money away for retirement but don’t know where to start?  In today’s difficult economic times it can seem difficult trying to find the best way to save for retirement.  The two main places that one generally starts with when it comes to retirement are an IRA and a Roth IRA.  This article will delve into each one and provide clarity as to which option is the best way to save for retirement for your particular situation.

Difference between IRA and Roth IRA

Let us start with the IRA first. The IRA is short for “Individual Retirement Account,” and is straightforward for the most part.  Basically, one deposits a certain amount of money into the account each year, and once they reach the age of over 70 they are then allowed to withdraw the money from the account in stages.  There are a multitude of investment options that one can consider when determining what to do with their money, such as stocks, mutual funds, bonds, and so on.

The money that is deposited into the account each year is tax deductible, so basically one can get a tax break on it.  There is no limit on who can apply for an IRA either, so those who make a lot of money can opt into the account alongside those who do not make a lot of money.  However, there are two things to consider when it comes to an IRA.  The first is that one can incur a penalty if they withdraw funds from the account early, along with having to pay taxes on it.  Even if one does not withdraw early they will still have to pay taxes on it anyways, and the amount is determined by the average income one earned over a set period of time.

Now on the other hand, a Roth IRA operates in a somewhat different manner.  One is taxed as they put money into the account, as opposed to a traditional IRA which is deferred until withdrawal. This can be beneficial in that one does not have to worry about taxes when withdrawing the money, but it can place a burden on one’s retirement funds early on.

ira calculator

As we can see gold backed ira is even better way to go.

Also, when it comes to a Roth IRA there is a certain annual income limit that one cannot exceed to deposit funds into the account, usually just over $100,000 if one is single, and $160,000 if married.  If that happens, one can simply switch over to a traditional IRA, but the tax situation changes as mentioned earlier.

By Michael Brown
Retirement planning expert and rollover IRA to gold adviser.