Which IRA is more Flexible and Profitable? Discussing Roth IRA and Traditional IRA

Roth IRA is considered a better investment vehicle over Traditional IRA, but it takes a groomed mind to understand the inherent tax incentives, and how they can benefit in the longer term. People with sufficient investment experience prefer to invest in Roth IRA over Traditional IRA. A newbie may not find Roth IRAs much attractive as there isn’t any immediate advantage, but experienced people usually venture out for long term benefits.

Now, let’s run into details and figure out if it really makes more sense to prefer a Roth IRA over Traditional IRA?

As you must be aware, Traditional IRAs let your money grow tax deferred till you actually opt for a withdrawal. While in a Roth IRA, you can take distributions after you reach the age of 59½ and your account should be at least five years old to qualify for tax free withdrawals. Roth IRA gives you the freedom to pay your taxes upfront. So, the decision to opt between a Roth IRA and a Traditional IRA should be based on the assumption of your tax rate at the time of your retirement and comparing it to your current rate.

It quite simple, if you think there is a higher possibility that your tax bracket will move up then it’s wise to pay your taxes now by opting for a Roth IRA. If it’s the other way around then Traditional IRAs make more sense.

In my view Roth IRA is good for someone who has just started off in his career, ideally for young people. Saving through Traditional IRA is more beneficial to someone who has possibly reached the peak of his career.

Apart from the major difference discussed above, there are several other factors such as easy access to funds and flexibility to take withdrawals that you need to consider before jumping into an IRA. Let me give you some key pointers that will help you in making a sound decision on your IRA choice.

• Traditional IRAs come with a glitch of 50 percent penalty on failing to take a required withdrawal after the age of 70½.
• You do not face compulsory withdrawals when opting for a Roth IRA.
• Roth IRAs are an ideal option for leaving tax-free money to your heirs, but remember that you do not get immediate tax advantages.
• When it comes to making early withdrawals, Traditional IRAs come with a 10 percent penalty on the amount withdrawn and the income tax on the same amount. While, Roth IRAs are a bit more flexible as they levy penalty on a portion of the withdrawn amount that is the earnings part.
• There is an option to take penalty-free withdrawals in both these IRA options, but these are subject to a certain clauses such as taking withdrawals for buying for first home or paying for college expenses.

Final Thoughts

Contributing to both kind of IRAs allow you to perfectly hedge against any tax rate changes that may happen in future. So, saying that one is better than the other won’t be entirely right. We can’t say which IRA is better; it may be different for every individual.

There are many brokerages that offer IRAs, here are a few that are offering good deals and we have handpicked them after considering key factors such as pricing, investment offerings, research tools and overall user experience to name a few. Check them out:-

Best IRA Deal Tax Season 2012: Free Trades and a Lot more with OptionsHouse

Opening No Fee IRA Account with TradeKing: A Quick Review of the Real Deal

Is Zecco a Suitable Discount Brokerage for Starting an IRA?

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