Posts Tagged 'IRA'

Traditional vs. Roth IRAs: what’s the difference?

As the Motley Fool says, there are actually 11 different kinds of Individual Retirement Accounts (IRA), but we’ll stick with the most popular: Traditional and Roth IRAs.

The main difference we’ll focus on is tax-deferred versus tax-exempt savings.

A Traditional IRA means you pay taxes when you withdraw your funds at retirement, but you will qualify for a tax deduction on the money you contribute to the IRA. So say you make $30,000, and you contribute $2,000 each year to your Traditional IRA. Come tax time, you’ll pay taxes on $28,000. That’s tax-deferred savings.

Roth IRAs, on the other hand, let your savings grow tax-free. You pay taxes on contributions (In our $30,000 income case, you pay taxes on the full $30,000 even though you contributed $2,000 to your Roth IRA each year). But when you start withdrawing funds when you retire, you pay no taxes on them. That’s tax-exempt savings.

Got it? So with a Traditional IRA, you take the tax hit come retirement. With a Roth IRA, you take the tax hit now, but your retirement funds come out tax-free.

Now, you could opt to do both, but check with your tax advisor to see how things stack up.

There are a few other differences between a Traditional and Roth IRA. Investopedia has a good article on the contribution, income, and age limits that IRAs stipulate. The good news is you can start an IRA for just $50, and can contribute up to $5,000 annually ($1,000 more if you’re 50 years old or older – they call those “catch-up contributions”).

Young Money has an IRA calculator, where you can compare the tax rate situation.

As with any retirement decisions, be sure you talk either choice over with your financial advisor. American 1 provides both kinds of IRAs. You can stop in to any branch to find out more.


Tax rebate information available.

Looking forward to your tax rebate this summer, but unsure of the timing or amount?

Look for more information at the Internal Revenue Service’s “Economic Stimulus Payment Information Center” at irs.gov. They also provide a handy rebate calculator that helps you determine how much you’ll get back. About.com has put together a reference site with links to many informational articles and sites, so check that out, too.

We ran an article in our April quarterly newletter about useful things to do with your check, including:

  • Save for a rainy day
  • Pay down high-interest debt
  • Keep up with maintenance on your vehicle
  • Pay a little extra toward your retirement with an IRA
  • Make long-awaited home improvements

The best thing? Be smart about it. Don’t waste an opportunity to get some things done, financially, that you’ve been putting off.

Also, check out the tax rebate FAQ we posted.


American 1 Federal Credit Union