It’s never too early to start saving for retirement, but which investment option should you choose? If you’re already participating in your employer’s 401k or 403b plan, you can supplement your retirement nest egg with an individual retirement account or IRA.
While you have the choice between a traditional or Roth IRA, there are certain situations when a Roth makes better financial sense.
When time is on your side
The best time to open a Roth IRA is when retirement is still in the distant future. When you invest in a traditional IRA, you can deduct your contributions each year, but you have to pay income tax when you begin making qualified withdrawals at age 59½. In addition, these withdrawals are completely tax-free.
When you need to make early withdrawals
A Roth IRA is also a good idea if you plan to make withdrawals before reaching age 59½. Unlike a traditional IRA, you may withdraw your Roth IRA contributions at any time without incurring a tax or early withdrawal penalty. In addition, if you’ve had your Roth IRA for five years or longer, there are several situations in which the IRS allows you to make early withdrawals.
For example, you can make withdrawals for qualified education expenses, including tuition, books, fees or room and board. While you will pay income taxes on earnings, you won’t pay penalties, and, again, amounts attributable to your own contributions will be tax-free.
You can also withdraw up to $10,000 for a first-time home purchase, as long as the money is spent within 120 days of the distribution. There is also no penalty for withdrawals made if you become permanently disabled or if you have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income.
When you don’t plan to spend the money
The IRS requires you to begin taking minimum distributions from your traditional IRA once you reach age 70½. With a Roth IRA, there is no such restriction, meaning you can continue contributing to your account as long as you like. Your money will continue to grow tax-free until you decide to withdraw it or until you die, wherein the account is passed on to a designated beneficiary.
Rebecca Lake is a freelance writer and virtual assistant living in the southeast. Lake received her master’s degree in criminal justice from Charleston Southern University.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on your taxes, your investments, the law or any other business and professional matters that affect you and/or your business.