Roth Vs. Regular IRA
When saving for retirement on your own, you have the option of going with a regular individual retirement account or a Roth individual retirement account. Both of these IRAs provide you with some type of tax benefit and one may be better than the other depending on your individual situation.
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Contributions
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With both of these types of accounts, you can contribute a maximum of $5,000 per year or $6,000 per year once you are over 50. With the regular IRA, you contribute this money on a pre-tax basis, which means that you reduce your taxable income by the amount of your contribution. With the Roth IRA, you contribute to the account with after-tax dollars. This does not reduce your taxable income for the year.
Investments
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Once you deposit money into a regular or Roth IRA, you can invest that money in various securities. Both IRAs generally provide you with many investment options from which to choose. You can invest in stocks, bonds, mutual funds, CDs, real estate and commodities. You could not invest in collectibles, life insurance policies or personal dealings, but everything else is fair game. These accounts usually offer more choices than 401(k)s or other similar retirement accounts.
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Income Guidelines
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With a traditional IRA, anyone can contribute regardless of how much money they make. If you want to contribute to a Roth IRA, you have to make less than a certain amount of money per year. For example, as of 2010, if you make less than $105,000 as an individual, you can make a full contribution to a Roth IRA. Once you get above $120,000, you cannot contribute anything. If you fall somewhere between those figures, you can make a partial contribution.
Withdrawals
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With either account, you can take money out after you reach the age of 59 1/2 without any penalties. If you need to access the money sooner than that, you would pay a 10 percent penalty on withdrawals from a traditional IRA as well as income tax on the money. With the Roth IRA, you can take out your contributions at any point without penalty. If you take out your earnings from investments, however, you would pay a 10 percent penalty.
Time Frame
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One of the differences between these two types of IRAs is the amount of time that you have to keep your money in the account. With both accounts, you cannot start taking money out until you reach 59 1/2. With the Roth IRA, there is an additional rule that says you have to wait at least five years before taking withdrawals. This means that if you open your account when you are 57, you have to wait until you are 62 to start taking withdrawals.
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