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re: Roth IRA vs Traditional Savings Account
Posted on 2/3/14 at 1:17 pm to meldawg399
Posted on 2/3/14 at 1:17 pm to meldawg399
This is a good explanation, but I'd like to add a couple points.
First, with a Roth IRA, contributions are available for withdrawal at any time, not only after 5 years. The 5 year rule only applies to tax free distributions at retirement.
The basic differences between Roth and Traditional are when you are taxed and at which rate. With the Roth, you are taxed today at today's tax rates (based on today's income). With Traditional, you are deferring that tax to the date of withdrawal. If your income (and subsequent tax rate) at retirement exceeds that of today, a Roth vehicle would have provided tax benefits.
As for why a Roth over a Savings account, there may be several reasons. Liquidity and availability, potential loss of principal (if I kept my Roth contributions in cash/low yield/risk, I'm not getting much advantage), no income or contribution limits. I believe everyone should be tax diversified and have funds available to cover anything that arises. A Roth does offer the advantage that contributions are available for withdrawal which may encourage you to use it first.
At your income level, a Roth sounds like a good option. However, if you consider minor "vehicle repairs" an emergency, you should probably split some funds into a savings account to cover those small unpredictable expenses.
First, with a Roth IRA, contributions are available for withdrawal at any time, not only after 5 years. The 5 year rule only applies to tax free distributions at retirement.
The basic differences between Roth and Traditional are when you are taxed and at which rate. With the Roth, you are taxed today at today's tax rates (based on today's income). With Traditional, you are deferring that tax to the date of withdrawal. If your income (and subsequent tax rate) at retirement exceeds that of today, a Roth vehicle would have provided tax benefits.
As for why a Roth over a Savings account, there may be several reasons. Liquidity and availability, potential loss of principal (if I kept my Roth contributions in cash/low yield/risk, I'm not getting much advantage), no income or contribution limits. I believe everyone should be tax diversified and have funds available to cover anything that arises. A Roth does offer the advantage that contributions are available for withdrawal which may encourage you to use it first.
At your income level, a Roth sounds like a good option. However, if you consider minor "vehicle repairs" an emergency, you should probably split some funds into a savings account to cover those small unpredictable expenses.
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