Welcome to professrsavings.com, we teach finance basics.
Today we will teach the difference between Roth IRA versus Traditional IRA in about two minutes.
Hi I’m Rayfil Wong. We hope these investment concepts will help you be a better investor.
The U.S. government offers two kinds of individual retirement accounts.
They seem similar but are not to be confused, traditional IRAs and ROTH IRAs.
These both are retirement accounts that include stocks, cd, bonds, and mutual funds.
The reason why one chooses Roth versus Traditional IRA is the tax rate imposed during retirement.
Let’s say that Professor Savings after teaching all those years maxed out on his 401k at the university.
With the Ira, the contributions or money would tax deductible.
Professor Savings falls into the 30% tax bracket.
If Professor Savings contributes $10,000 into his traditional IRA, he would not have to pay the $3000 in income tax on this amount.
Professor Savings is now retired and withdraws the IRA and withdrawals at retirement are taxed as income.
Now on the other hand, let’s say that Professor Savings invested a ROTH IRA.
He sets aside $10,000 for the account, but this time the contributions are not tax exempt.
If he’s in the same 30% tax bracket today, only $7000 is going into the account. The 3000 goes in taxes.
However, the ROTH IRA has 2 major advantages.
One, since you have already paid for the tax on contributions the ROTH IRA
is a tax free growth and also tax free withdrawals in retirement days.
Two, there are no minimum contributions while IRA usually do.
Consult a financial advisor for specific terms. We are here to let you know that
finance basics can be pretty simple to learn.