retirement

Traditional IRA vs Roth IRA – The Difference

Learning the Differences: Traditional Versus Roth IRAs

Many people ask about the difference between the two most popular investment accounts out there, and most people want to know which one is the best. While the answer is never cut and dry, there are some very important differences between the two types that can have a profound, however individual, effect. If you are looking into putting your money into an IRA, then you should be well aware of the differences and how they will affect your life later on down the road. To help you get started, here are just a few of the difference that you need to take into account.

Traditional IRA Accounts

The traditional IRA is something that people choose to put money into in order to invest for retirement. These accounts allow for tax deductible contributions
throughout the year. While you can begin drawing on the funds at the age of 59 and ½, you will be forced to draw on them when you reach 70 and ½. These funds can later be used to purchase a wide assortment of investment products and it gives you the freedom to have the financial strategy that you want. There are no income restrictions on the traditional IRA, and you can be any age to acquire one. Taxes will have to be paid on any earnings that you withdraw from the account, and any money you withdraw before you reach the age of 59 and ½ you will pay a 10% penalty on unless you fall under one of the IRS’s eight exception rules.

Roth IRA Accounts

While the Roth IRA serves the same basic purpose as the traditional IRA, there are some differences that can make it a better, or worse, choice for your situation. Unlike the other, contributions that are made to the Roth IRA are not tax deductible. At the same time, there is no age that you will reach where you will be required to take distributions. Unlike the traditional IRA, the Roth IRA allows for all earnings, as well as principal, to be withdrawn totally tax free if certain rules are followed. These funds can be used to purchase a wide assortment of investment options, again, giving you control of your financial strategy.
Principal contributions to the account can always be withdrawn as well, but only people that make under a certain amount can acquire one of these accounts.

The Difference is in the Taxes

While the Roth IRA and the Traditional IRA both have some similar points, there are a few major differences. In the end, these differences come down to taxes. While the first option allows for tax deductible contributions, the second does not. Inversely, there is no tax charged on withdrawing funds or earnings from the second choice, while there is on the first. For many people, the Roth seems to be the best choice, but not everyone can get one of these accounts. Because there are so many differences, it is important that you look at everything and choose the one that is right for you and your specific retirement investing and financial situation. [click to continue…]

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401 (k) Investments

401 (k) investments are often looked upon by employees as their retirement cushion savings. As critical as the purpose of 401 (k) investments is, most individuals look upon the sign up and maintenance process for their plans as a routine chore that is taken over by professional investment managers once the paperwork has been completed.

The truth, however, is that in order to maximize retirement savings and achieve peace of mind during the golden years, individuals need to be more actively involved in the management of their 401 (k) investments. Most employers give you the option of customizing your plan and actively choose and distribute the asset allocation strategy.

These plans are highly customizable and depending on what your employer offers, you can select from some of the following (although more possibilities exist, we cover the important ones):

Mutual funds

Well, most of us know what mutual funds are. They are vehicles, wherein a large pool of money is created from investments by multiple investors. The advantages are that one gets to diversify (in fact some mutual funds attempt to achieve stock market-like diversification to emulate the performance of S&P 500 and such large indices). If your plan offers you the option of selecting these as one of your asset classes, consider selecting the top-performing ones with a proven track record. Mutual funds further allow you the option of allocating your investment through money market, growth, international, stocks, bonds, and more. Depending on your employer’s offering, you may be able to allocate your money to one or more these asset classes.

Fixed income funds

You can also allocate your 401 (k) investments to fixed income, which essentially guarantee a fixed interest rates as a result of backing from guaranteed interest contracts powered and underwritten by insurance companies. Traditionally, although there is some form of interest rate guarantee there is also an associated risk of getting stuck with lower interest rates and slower growth potential.

Stocks

Corporate stocks, though potentially lucrative, present a very high degree of risk due to market forces and volatility. Depending on your age, proximity to retirement, and income you may want to balance the risk associated with these.

Bonds

Bonds could be either corporate bonds or savings bonds issued by the US Department of Treasury. Although lower risk, these instruments offer fixed income rates. Savings bonds are considered relatively safe investments while corporate bonds are rated by independent rating agencies.

In addition to these traditional asset classes, your 401 (k) investments could also be allocated to a variety of additional sophisticated asset classes and investment options. Your fund manager can provide you additional information about these options. Remember, though, these plans are not backed by government guarantees or insurance.

Disclaimer: This article is not intended as investment advice. You must check with a qualified professional before making any investment decision.

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