Question

1. Differentiate between a Deductible IRA and a Roth IRA. Provide examples to substantiate why individuals/couples would choose either.

Answer 1

Roth IRA : is a special retirement account in which all income post taxes is deposited and the withdrawals that are made at the end are all tax free.

In a deductible IRA : all the deposits that are made are free from taxes, the depositors get tax deductions on the contributions made and have to pay income tax when they withdraw money form their account. For example : High-income earners may find it best to take a deduction now and pay taxes in retirement when they could be in a lower tax bracket.

For example, If as a couple we are expecting that the tax rates will decrease at the time of retirement, then we should go for a deductible IRA. This allows tax savings today and pay lower tax when withdrawing funds at the tome of retirement.

In case, the taxes are going to rise at the time of retirement then we should go for the ROTH IRA As that can be advantageous. Instead to receive a tax deduction for contributions, Roth proposed allowing people to fund an IRA with after-tax money. Since the contributions had already been taxed, withdrawals in retirement would be tax-free. Gains that are made on the investments could also be withdrawn tax free.