How to Choose an IRA

For a lot of people, retirement seems like something way in the future, something they don’t have to think about right now. In truth, though, retirement comes sooner than people think, and it’s something they need to start planning for pretty much as soon as they start working. While there are many options to save for retirement, such as 401(k)s, IRAs are a lot more accessible for most people and offer more diverse savings options as well.   

But, what, exactly is an IRA? This is a question many newcomers to the working world have but are afraid to ask for fear of sounding stupid. First of all, IRA stands for “individual retirement account.” These accounts can be opened by anyone who works and/or who has taxable income, providing that the person is not yet 70.5 years in age. People who have IRAs can put tax-deferred investments into them and then later use that money when they retire.

Not all IRAs work exactly the same, however, and it’s important to choose the one that’s right for you. While there are all kinds of IRAs available, most people, especially when they’re just starting out, are going to open either a traditional IRA or a Roth IRA.

Traditional IRAs Vs. Roth IRAs

Traditional IRAs offer a way for people to invest money toward retirement without having to pay taxes on the money they set aside. However, they will have to pay these taxes when they retire and withdraw money from the account.

Roth IRAs work in the opposite way. The money that is put into them is taxed, but account holders do not have to pay taxes when they retire and wish to make withdrawals.

So, thinking about whether you want to be taxed now or later is one way to help make the decision between Roth and Traditional IRAs. Also keep in mind that if you already have a work-sponsored retirement plan, you might not be entitled to the tax deductions typically offered by a traditional IRA, which would make a Roth a better choice for you.

Another thing to keep in mind is that the Roth IRA does have some limitations on who can contribute and how much. For example, the only people who are allowed to contribute the full amount to their Roth IRAs are people who file on their own and who have an adjusted gross income of under $114,000 or people who file jointly and have an income of under $181,000. If you wouldn’t be eligible to contribute as much as you want with a Roth, then a traditional may work better for you.

On the flip side, though, traditional IRAS require account holders to meet minimum distribution requirements one year after they turn 70.5 years of age, but Roth IRAs don’t have any minimum distribution requirements.

Obviously, there are benefits and drawbacks, give and take, with either option. Your best bet is to consider your choices carefully, weigh the pros and the cons, and speak with a financial advisor about which option would work best for you and your particular situation. With all that work and help, it should be easy to determine which IRA is the best fit for you and your needs.

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