Your Guide to the Roth IRA, Part 2
Fast track your retirement savings with this tax-advantaged account.
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This is the second episode in a 2-part guide to the Roth IRA. In the first episode I covered what a Roth IRA is, who can have one, and the rules for making withdrawals. Today, you’ll find out when you should opt for a Roth IRA, the types of investments a Roth is ideally suited for, and where to get one.
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What Is a Roth IRA?
As you learned in part one, an IRA is a special account that helps you build a healthy nest egg by cutting your taxes.
Contributions you make to a Roth IRA are never tax deductible, which means they’re taxed before going into the account. However, your earnings grow completely tax free and then you can take withdrawals during retirement without owing a penny to Uncle Sam.
These rules are the opposite of a traditional IRA where contributions are tax deductible but you pay tax on both contributions and earnings when you take withdrawals in the future.
When Should You Get a Roth IRA?
Since a traditional and a Roth IRA both have fantastic advantages, you may have a hard time knowing which one to choose. Here are 5 situations when it makes sense to opt for the Roth:
1. When your income is low. If you’re earning less today than you believe you’ll earn in the future, then the Roth is probably your best choice. That’s because you’re in a relatively low tax bracket right now, compared to what it could be in the future.
Therefore, if your tax rate is low now, it’s cheaper to pay tax on Roth contributions than to pay tax on withdrawals from a traditional IRA in the future when your tax rate may be much higher.