Question

In: Accounting

What is your preferred investment, Traditional IRA or Roth IRA. Provide support for your response.

What is your preferred investment, Traditional IRA or Roth IRA. Provide support for your response.

Solutions

Expert Solution

A traditional IRA is a retirement account for an individual that permits to make contributions on a pre-tax basis (if my income is below a specified level) and pay no taxes until I withdraw the money. Thus it's an attractive option for investors who expect to be in a lower tax bracket during retirement than they are presently. Conversely, Roth IRA contributions are done with after-tax dollars. The advantage of a Roth IRA is that I can withdraw the contributions and earnings tax-free after attaining the age of 59½, if I had maintained account for at least five years, or have met specified conditions. Additionally it provides the benefit that after-tax contributions to the Roth account can be withdrawn at any time, tax and penalty-free however, if an early withdrawal of any earnings is done will be imposed a penalty.

Since I am in a higher tax bracket during retirement than they presently, thus will prefer Roth IRA as it can also offer few spending flexibility in retirement, as money can be withdrawn without increasing the tax bill and need not to take annual needed minimum distributions (RMDs) after turning 70½.


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