There are several things to consider about investing in a Roth vs traditional IRA account. Both a Roth IRA and a traditional IRA have some benefits. However, they both have a few drawbacks as well.

Traditional IRA

The term IRA stands for Individual Retirement Account. If you have this type of account, all of the contributions are made by you. With a traditional IRA, you are able to make tax-deductible contributions. Therefore, if you contribute $5000 to the IRA in a given year, your taxable income will be reduced by $5000 for that year. 

The money that you put into the IRA is allowed to grow tax free over the years until you withdraw it. You are allowed to start making withdrawals from the account when you reach the age of 59 1/2. At that point, the money that you withdraw will be taxed as regular income for you. If you withdraw any money before you reach the age of 59 1/2, you will have to pay a 10-percent penalty on the amount withdrawn. Therefore, early disbursements are greatly discouraged. 

With this type of plan, you can take advantage of a number of different investments including stocks, bonds and mutual funds. There are also no income restrictions on this type of plan. This means that anyone can get one regardless of how much money he or she makes. 

Roth IRA

With a Roth IRA, you are going to contribute to the plan with after-tax dollars. Therefore, there is no tax deduction for the money that you put into the account. However, the money that you deposit is still allowed to grow tax free in the account. Then when you reach the age of 59 1/2, you can start withdrawing the money. The big advantage with this type of account is that when you withdraw the money at age 59 1/2, you do not have to pay any taxes on it. In other words, you get all of the tax paying out of the way when you fund the account. With Roth IRA's, there are income restrictions. If you make over a certain amount of money, you cannot open this type of account.

Choosing Which Type

When trying to decide which type of IRA to go with, there are a few things that you will have to consider. One thing to think about is your tax bracket. In most cases, people end up in a bigger tax bracket than when they started out their professional lives. If that is your situation, you will actually pay less in taxes when you contribute than you will when you withdraw. 

Something else to consider is how much money you think you could make from investing through your IRA. If you do really well, all of the profit that you make from investing will be tax free. 

For many people, because of these two factors, the Roth IRA is the better choice. It is better to bite the bullet early and pay your taxes. Then when you retire, you can have tax-free money to live on. 

Disclosure Statement

A disclosure statement is a document that is provided when someone is opening a new IRA account. When you open an IRA, you have to be given this disclosure statement at least seven days in advance of opening the account or have the ability to back out of the account within the next seven days. This document provides vital information about the IRA, including fees, policies and other information. This document also provides information about potential penalties that an individual could incur if he or she decides to cash out the account prior to reaching the full retirement age of 59 1/2.

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