Do you have an IRA or does your employer have a 401(k) plan? If it does, we hope you are participating in the program, especially if it matches your contributions. According to the website 20SomethingFinance, employers can contribute whatever amount they choose, but the maximum on total contributions (employer plus employee) this year is $54,000, or 100% of your salary, whichever is less.
If you’re fortunate, you’re on the way to that $54,000, thanks to your employer’s help. However, most companies are not as generous. For example, some will match $.50 for every $1.00 you invest in the plan. But whatever the case, this is free money, and we hope you’re taking advantage of it. Plus, the money you contribute is income tax exempt.
If there’s no 401(k)
If your company doesn’t offer a 401(k), this isn’t abnormal, as not all companies have them. In fact, according to the website, benefitspro, about 6% of all 401(k) plans have been terminated since 2009.
This means that you’ll have to set aside your own money for retirement. You could do this with either a regular or Roth IRA. It’s important to understand the differences between these two plans so that you can make a good, informed choice.
Traditional IRA
You’ve read one of the most important advantages of a regular IRA, which is that your contributions are tax exempt. This means you’ll have more money to invest, and thanks to compound interest, your savings will grow faster than with a Roth IRA.
Another advantage of a regular IRA is that it protects your money from creditors, though it cannot be used as collateral.
With a regular IRA, you will be required to start taking minimum required withdrawals when you reach age 70 1/2, and this money will be taxed.This year, the maximum you can contribute to a regular IRA is $5,500, or $6,500 if you’re 50 or older.
Roth IRA
Many financial advisors believe a Roth IRA is a better option for many people. The money you invest in a Roth is taxable, but if you keep the account until you reach the age 59 ½ and have made contributions continuously for at least five years, you won’t be taxed on the money you withdraw.
There’s also no requirement that you must make mandatory withdrawals from a Roth IRA when you reach age 70 ½. You could continue contributing to your Roth IRA – depending on your earned income. In contrast, once you reach 70 ½, you can no longer contribute to a regular IRA. So, with a Roth,  you have three options: you can continue contributing to it, let it sit there increasing in value, or to make withdrawals as you need the money. Of course, the best alternative is to keep the money in your Roth as long as you can.
How much can you contribute to a Roth IRA?
According to Motley Fool, the maximum you can contribute to a Roth IRA this year is $5,500 if you file a joint return and your joint income is less than $184,000. If your income is between $184,000 and $194,000, you can make a prorated contribution. In the event you reach age 80 by the end of 2015, you can contribute an additional $1,000.
Do you file single and your income is less than $117,000? Then, according to the IRS, the maximum contribution you can make is $5,500. You’re allowed to make a prorated contribution if your income is between $117,000 and $132,000. You can contribute an additional $1,000 if you reach age 50 by the end of 2015.
In summary
As you have read, both the regular and Roth IRA have their advantages. However, if you’re under the age of 30, your best option may be a Roth. But before you chose one of these two options, it’s important to weigh the pros and cons of each. You might also want to discuss them with a financial planner.