So You Wanna Retire? Get Roth with it!
I want you to take a moment and picture yourself years from now, at retirement age, silver-haired and wrinkled. Do you see yourself basking in the sun at your second home in a sunny clime? Are you removing your dentures in order to enjoy a decadent sundae at a favorite diner? Whatever your dreams, the surest way to make them come true is to take advantage of individual retirement accounts (IRAs).
In the interest of time (we ain’t getting any younger), let’s take a look at the basics of two popular retirement choices: the traditional IRA and Roth IRA. While there are many retirement accounts to choose from (which you should explore!), these two options offer ease and potential great savings for young investors.
This Individual Retirement Account was created in the Stone Age (1974), and has reliably helped investors save for the golden years ever since. In the traditional account, your contributions come from money that has never been taxed, so you end up paying taxes when you withdraw your money later in life. For example, when you put in $2,000, you get a $2,000 deduction on your taxes for that same year.
Essentially, with this IRA, you are paying these deferred taxes later, when you take out the money. You can access this money penalty-free when you turn 59.5—party time! However, the traditional way is not too friendly to those who need to take out their money early, and charge a penalty and taxes for early withdrawal. You have to start withdrawing by age 70.5, or else you’ll be hit with more penalties. For those investors 50 and below the maximum amount you can contribute per year is $5,500.
The Roth Ira is the new kid on the block, and he’s pretty cool. Named after Delaware senator William Roth, this retirement account taxes your contribution before you put it in the account. Because your contributions come from money that has already been taxed, you don’t get any deductions on your taxes for the corresponding year. But, you also don’t pay any taxes when you take it out later. Essentially, you are paying taxes at the moment of investing.
You can draw from your contributions at any age without financial consequence (but not the growth on those original contributions). There is also no age requirement for when you have to start withdrawing. For those under 50, the maximum contribution is $5,500.
With both, the money you invest will grow without being taxed yearly and will increase depending on the investments you choose. Get ready for a rich retirement!
Opinions belong to contributing authors, not to Float, Inc. or Float Credit, Inc. Please consult your financial adviser or investment adviser regarding your individual financial and investment decisions. This blog is intended for educational purposes only and should not be construed as investment or tax recommendations.