A Roth IRA is a type of retirement plan that lets you take advantage of a lower tax rate at present, instead of having to pay a higher tax rate when you withdraw your retirement savings. It is different from other IRAs, like a 401(k), in that it is a separate investment account that you can fund with your after-tax income, so that when you retire, you won’t have to pay taxes when you take the money out. You also won’t pay taxes on any interest you accrued in that account, provided that you have retired or have had the plan for at least 5 years.
A Roth IRA provides enough flexibility to allow for investments into a variety of plans like stocks, bonds, mutual funds, derivatives, notes and even real estate. Contact us if you need investment and Roth IRA help in the Riverside area.
Who Benefits The Most From A Roth IRA?
Any taxpayer who earns a compensation (as a wage, salary, commission, bonus etc.) that falls within the Modified Adjusted Gross Income (MAGI) limits are eligible to contribute to a Roth IRA. If you have started to plan for your retirement at a very young age, when you are likely to fall into a lower tax bracket, the Roth IRA would prove to be a good retirement option for you.
With a 401(k), you would avoid taxes for now, but that would set you up for a tax deduction on withdrawals during your retirement, when there would be little or no income from any other source. It may be more astute on your part to pay taxes NOW, when they are lower, as compared to later in life, when they would be higher.
A Roth IRA Is Best For Low Contributions
For individual taxpayers below the age of 50, the annual contribution limit is $5,500, which increases to $6,500 for those who are 50 years or older. This is quite decent for a young contributor who may not be earning a very high salary. Even if one is contributing $3,000 per year, starting at the age of 22, the annually compounded interest would add up to a significant figure by their retirement age. And the withdrawals would all be tax-free.
In comparison, the contribution limit of 401(k) is definitely higher at $18,500 per year, but anyone starting out young may not be able to contribute that much initially anyway. Also, the associated tax deductions would definitely impact the final accumulated earnings.
Investing For The Long-Term
A Roth IRA would be great for a young worker who has entered an industry for the long haul and would not be needing to use their retirement funds in the near future. And if they needed to make a withdraw, they could access their funds after 5 years, tax free.
Essentially, the decision to go for a Roth IRA or 401(k) comes down to the choice between immediate or deferred consumption, i.e., whether or not you are willing to pay the taxes now, to enjoy a tax-free retirement income. It also depends on your current financial position, anticipated needs in the future, along with the investment horizon that you are looking at.