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There are some cases when a Roth IRA can be better than a traditional Individual Retirement Account. The Roth account offers some tax advantages particularly for persons facing a significantly lower income in their retirement years. It also offers some serious disadvantages for average people that are still working.

There are also some people that would only be able to take advantage of a Roth IRA. The reason for this is the Internal Revenue Code which puts strict income limits on IRAs only people that make less than a certain amount can contribute to them.

Difference between Roth and Regular IRA

The difference between a Roth and a regular IRA is in the way it is taxed. When you contribute to a regular IRA you will not have to pay federal income taxes on the funds until you take them out. When you contribute to a Roth you have to pay your regular federal income tax but there will be no income tax when you take the money out.

A regular IRA could put you in a higher tax bracket when you are retired because funds from it are taxable income. A Roth IRA will not affect your tax bracket after you retire because you’ve already paid the tax. Money in a Roth and money taken out is essentially income tax free.

That means a person who will be on a limited income and unable to pay higher taxes after retirement could benefit from a Roth. It is also possible to get a Roth annuity that functions in much the same way and a Roth 401K. People with higher income right now might benefit from one.

Which is Better for You: Roth or Regular IRA?

Your situation now should dictate the kind of IRA that you get. A person with a limited income who needs to save for retirement might benefit from a regular IRA. A person that can afford to pay the additional taxes now but not in the future would be better off with a Roth.

Jerry is a salesman who is generating a lot of fat commissions and extra cash right now. He would benefit from the Roth because he could use that money to pay taxes now. Then when he is retired and has no extra income coming in he will not have to worry about the extra taxes.

Wally has a fixed income and a high tax bill right now. He might benefit from a traditional IRA because he could deduct the contributions he makes and lower his tax bill.

Drawbacks and the Annuity Alternative

There are some serious drawbacks to http://thegoldrushexchange.com/buying-opportunity-for-long-term-investors both Roth and regular IRAs that you should definitely be aware. First there are the contribution limits right now a person under 50 can only contribute about $1,000 a year to both plans. A person over 50 can only contribute about $5,000.

Since they are retirement plans people who are 59½ years old or younger will have to pay a 10% tax penalty if they withdraw money from either plan. That provides a small advantage to persons that need to reduce their tax burden. The only exception to this rule is certain emergency situations.

Deferred annuities are affected by the same 10% penalty but there is no income limit on them. Nor is there any limit on the amount of money you can contribute to a deferred annuity. Deferred and other annuities could be a better alternative particularly to people with large incomes. Something to remember is that an annuity is tax deferred just like a regular IRA is.