Personal Finance

Once you have an established budget and have started saving regularly, you can start looking into other retirement investments. Fortunately there are several different investments that are designed to encourage you to plan for your own retirement. Specifically I am talking about an individual retirement account.

Also known as an IRA, the individual retirement account comes in many variations. There is not one specific IRA that is best for everyone’s circumstances, so it is important that you understand all the pros and cons of each account.

One of the most well known variations of the traditional individual retirement account, is the Roth IRA account. To give you an idea of the differences between these accounts, let us take a look at the two mentioned.

The two accounts are similar in that they both offer perks for the investors for the purpose of encouraging them to invest in their retirement. This is meant to ease the strain on the social security system. The traditional IRA is tax deductible. This means that all contributions to the account can be written off of your income when filing your taxes. So you can save money now on taxes by contributing to this account. The Roth IRA is not tax deductible. Most would consider this a negative, but it really isn’t for some. The fact that you deduct your IRA contributions from your income means that you have to pay taxes on the fund when you withdraw at retirement. However, the Roth IRA will have already been taxed at time of contribution and doesn’t need to be taxed at withdrawal. Taking into account that there are maximum contribution limits on both accounts, if you put $3000 into a traditional IRA and the same amount into a Roth IRA, the Roth will have a greater actual return.

Clearly everyone needs to decide on an individual basis which account is right for them.