The main difference of using a Roth IRA over the traditional option is the tax. In retirement, you will be able to access your money without being charged a tax fee. However, any money you pay into the account will be taxed when you contribute.
The most common reason for choosing a Roth IRA is if you are concerned that you will fall into a higher tax bracket once you reach retirement. This will mean paying higher taxes when you withdraw your money.
There are Roth IRA limitations that are significantly lower than some other retirement plans. You are able to contribute $6,000 annually if you are under 50 years of age.
If you are 50 years of age or older, you may contribute up to $7,000 each year.
Additionally, you cannot contribute money to a Roth IRA account if you make more than the following amount of money each year:
- $140,000 for single people
- $208,000 for married couples
One advantage of a Roth IRA is that it does not have a required minimum distribution. A required minimum distribution is the amount of money you must withdraw from a retirement account by a certain date and age.
Both 401(k) plans and SIMPLE IRAs have a required minimum distribution. If you would like to open a Roth IRA account, you will need to apply through a bank, credit union or another financial institution.
Any financial institution that offers Roth IRAs must have approval to do so through the IRS.