There are two choices when setting up an Individual Retirement Account (IRA): a Traditional IRA or a Roth IRA. In order to decide between, it is important to understand both.
A Traditional IRA allows you to defer paying taxes on the money in your retirement account. Basically, you receive an income tax deduction for qualifying contributions to your retirement account. Then, you pay taxes later, on the money you withdraw from your account. This allows you to earn investment income on the money you would have otherwise already paid in taxes.
In contrast, a Roth IRA requires you to pay taxes on money before contributing it to your retirement account. However, you do not have to pay taxes on the money when you withdraw it. Over many years of savings, this could save you a substantial amount of money in capital gains tax. It is important to note that there are maximum income limits on who can qualify to make Roth IRA contributions, which start at $114,000.
Additional information on Roth IRAs can be found online at the IRS’s website or in IRS publications. If you have questions about which type of IRA is best for you, you would like assistance setting up an IRA, feel free to contact us at (626) 696-3145.
