What's the difference between a Roth IRA and a Traditional IRA? We get asked this question very frequently, so we put together a breakdown of the two. Watch this week's Arista Advice to find out.
Hello, welcome to Arista Advice. Question of the week is: "What is the difference, Paul, between a Roth and a Traditional IRA?"
This question comes up on a recurring, frequent basis, so let's talk about it again.
Number one: There are three buckets in which all of your account types fall under: a taxable, tax-deferred, and tax-free. Let's talk today about the tax-deferred and the tax-free.
A tax-deferred account is a traditional IRA. The third bucket, a tax-free bucket, is a Roth IRA. The taxable bucket holds all of your non-retirement funds, such as individual accounts, joint accounts, paychecks, savings accounts, checking accounts, bank accounts, or trusts.
The tax-deferred holds your 401(k), your IRA, your HSA, Annuity. Those are tax-deferred vehicles.
Tax-free vehicles are very few and small in between. It's really a Roth feature in a 401(k) and/or a Roth IRA.
IRAs are a great tax advantage investment account that has the capacity to elevate your retirement. The question is what is the difference between the two types of IRAs.
A traditional IRA, above-the-line deduction for contribution amounts is one benefit.
A second benefit is that the deduction phases out as income increases.
A third benefit is money grows tax-deferred, and a fourth option is you pay taxes on the larger amount that you gain throughout the life of the account.
Roth IRAs - they are tax-deferred investment vehicles. Taxes are paid on the front-end, before tax, and the money grows tax-free and comes out tax free. If you hit and satisfy the two requirements of five years and over age 59 and 1/2, and the third feature: all gains and principles grow tax-free, and they come out tax-free either to you or the beneficiary and/or to your children or charity that you list as the beneficiary of your Roth IRA.
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