Old age comes with a lot of challenges and consumers have found themselves with little or no money to take them through the life after retirement. Although the idea of retirement accounts might have been started decades ago, it is only until recently that consumers were able to find suitable retirement accounts. Before then, it was difficult to find IRAs which required sizable investment or with not annual maintenance fee.
But things have since changed and today, consumers can find IRAs with sizable investment. One confusing thing when seeking for retirement accounts is differentiating between traditional or regular IRAs and Roth IRAs. With the regular or traditional IRA, you have your money deducted from your income and put to the retirement account for the year provided that you meet the requirement for deductible IRAs.
These deductions reduce your tax in that year. Moreover, the money in the retirement account grows tax-free but should you decide to withdraw it, then every dollar is taxed as a normal or ordinary income as it would happen with the earnings from your job. On the other hand, the money in Roth IRA attracts no tax deduction meaning that it will not lower your taxes suddenly.
The money in the Roth IRA will start growing tax-free, and if you leave it in the account until you reach the age of 59 ½, you will generally never be taxed for it. When choosing between Roth IRA and traditional IRA, there are certain things you should consider. If you foresee that your tax rate will be lower when you withdraw the cash than it is today, then the best way you can go is a traditional IRA.
However, if you predict that the tax rate will be higher when you withdraw the money than it is today, then you can go for Roth IRA. The Roth IRA is recommended for young people because their tax rates are lower today than they may be when they retire. In addition, since the young people may be faced with a financial situation that compels them to withdraw the money before they are 59 ½, it gives them more flexibility when they have the Roth IRA.
One reason why you need to invest in an IRA financial plan is because financial experts predict that you may need close to 85 percent of your pre-retirement income when you eventually retire. Even when you have employer sponsored saving plans such as the 401 (k), they may not be sufficient to cater for the savings you need. The good thing is that you can make contributions to both the 401 (k) as well as the IRAs.
The IRAs will enable you supplement your current saving from the employer sponsored retirement plan. In addition, retirement accounts helps you gain access to wider range of investment when compared to the employer-sponsored plan. These accounts also allow you to take advantage of potential tax deferred benefits and tax-free growth. In order to get the maximum benefits from the IRAs, you need to ensure you make optimal contributions each year, as this will enhance your savings.
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