By: Clay Wyatt
The winner in the battle of IRA vs. Roth IRA taxes depends on your financial situation. Those who wish to save on taxes now will be better off with an IRA. A Roth IRA may be better for those who wish to save on taxes during retirement. Let's take a look at IRA vs. Roth IRA taxes.
IRA accounts are taxed during retirement. So, you can deduct your contributions from your current taxes and the money will grow tax-free in your account. Of course, it's never that easy, as you're maximum contribution amount can be $5,000 if you are under the age of 50 at the end of 2011 and $6,000 if you are 50 or older before the end of 2011, according to the IRS. The same applies for 2012.
So, when comparing IRA vs. Roth IRA taxes, this may seem great. You're money will not be taxed when you put it in and it will grow free. However, there is always a catch when dealing with IRS regulations.
The money will be taxed at your ordinary income tax-rate when you retire, provided that you wait until at least age 59 ½ to take withdrawals. Before this age, you'll have to pay taxes and a 10 percent penalty to take withdrawals unless you meet 1 of the IRS waiver provisions. The taxes will be on the amount that you deposited and your earnings, so you'll eventually pay the piper on everything in your IRA account.
Roth IRA Taxes
When comparing IRA vs. Roth IRA taxes, a key difference is that a Roth IRA's contributions are taxed. So, if you decide to invest $5,000 in a Roth IRA, you'll pay taxes on that contribution in the current year.
Why would anyone want to do that when they are tax-free with an IRA? The answer is that IRA contributions are not really tax-free - just tax-deferred. This means that you'll pay taxes on them during retirement instead of at the present time. However, with a Roth IRA, you'll pay taxes at the present time and that is it. There are no taxes on Roth IRAs during retirement - including on earnings. So, only the contribution is taxed, not the earnings, giving it a major advantage over an IRA.
When comparing IRA vs. Roth IRA taxes, a Roth IRA also has the advantage of you knowing your tax rate. Taxes may be lower or higher in the future, but who really knows what they'll be? With the enormous national debt and a plethora of unfunded liabilities, Uncle Sam is probably going to have both hands out for tax revenue in the future, meaning that rates may be higher. Think of a Roth IRA as a less risky way to pay taxes on your retirement investments, although that is not a guarantee that you'll end up paying less in the long run.
Be sure to speak with a financial advisor or tax professional before making any tax-related decisions on your IRA or Roth IRA accounts. Determining the winner of IRA vs. Roth IRA taxes is too big of a gamble to take without knowing the ins and outs of your financial outlook. Have a financial advisor assist you with figuring out the specifics if you are unsure of what to do.
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