In very simple terms...wht is the difference between IRA and ROTH IRAs?

Question

I am leaving my job and intend to roll over my 401k into an IRA w/ fidelity. I was wondering which was a better deal. I make less than 50,000 a year and heard that a ROTH IRA was agood deal. Can someone tell me the difference plu the pros and cons of each one. Unfortunately im not very financially savvy so i will need someone to break it down in simple terms.

Answer 1

In very very simple terms, ROTH IRA is the best way to go! .... or you can read on.

Traditional IRA: Your contributions can be tax deductible. If you withdraw any money from it after age 59 1/2, you will pay income tax on it (except on the contributions you didn't make tax deductible). Any non qualifying withdrawals before age 59 1/2, add 10% tax on top of your income tax. You must take the minimum withdrawal requirement at age 70 1/2 or there will be a 50% tax on it.

Roth IRA: Your contributions are not tax deductible. When you withdraw money from it after age 59 1/2, you do not pay any taxes on it. Any non qualifying withdrawals before age 59 1/2, add 10% tax on top of your income tax. You can hold the account for life and pass it to your heirs or beneficiary.

You can avoid the 10% early withdrawal tax if it used for:
1) Purchase of a first home (up to $10,000 can be withdrawn)
2) Higher education expenses
3) You are permanently disabled
4) You are terminally ill
5) You are unemployed and need to pay for medical insurance.

Answer 2

Roth is with after tax money and won't be taxed at all when you withdraw.

Traditional IRA will be taxed when you withdraw it.

If you roll your 401k into a Roth, you'll have to pay taxes and fees on it. Roll it into a traditional IRA and you won't have any tax consequences at this time.

Roth is a good deal to start and contribute too, but perhaps not in this situation. Speak with a financial advisor because your situation is unique to you and you might have a different goal/strategy that you need to follow.

Answer 3

In the simplest terms, the ROTH IRA would be your very best avenue. The ROTH IRA deals with after-tax money and grows tax free. The IRA deals with before tax money and when you withdraw it everything becomes taxed. I would advise you to seek a qualified tax professional. Investing in both should give you credit on your tax return every year. The ROTH can provide you with many possibilities down the road.

Answer 4

An IRA is funded with pre-tax dollars, a ROTH IRA is funded with after tax dollars. 99 times out of 100, a ROTH IRA is a better bet. Here is a blog where I read all about ROTH IRAs.

Answer 5

both IRA's are good

if you transfer it to a Roth IRA, you will have to pay a one time tax to do that

if you transfer it to a regular IRA, you won't have to pay any tax. best is to transfer it here, and open a roth ira and begin to make contributions to it. go to your local bank and ask to speak to their investment representative and they can help you with the paperwork.