Question

In: Finance

2) Explain why both an IRA and a Roth IRA can be attractive savings vehicles. Include:...

2) Explain why both an IRA and a Roth IRA can be attractive savings vehicles. Include:

a) Common advantages of each

b) Different advantages of each

c) When each might be preferred

Solutions

Expert Solution

2) Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.

a)  Roth IRA and a IRA is how and when you get a tax break: The tax advantage of a IRA is that your contributions are tax-deductible in the year they are made. The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed.

b) The disadvantages of IRA is that you'll pay taxes in retirement and you'll be subject to required minimum distributions. the disadvantages of Roth IRA is that you pay taxes upfront and there are income limits.

c) If you are eligible for both a Roth and a traditional IRA. Generally, you're better off in a traditional if you expect to be in a lower tax bracket when you retire. By deducting your contributions now, you lower your current tax bill. When you retire and start withdrawing money, you'll be in a lower tax bracket, thereby giving less money overall to the tax man. If you expect to be in the same or higher tax bracket when you retire, you may instead want to consider contributing to a Roth IRA, which allows you to get your tax bill settled now rather than later.


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