Many investors who have a retirement plan outside of an employer’s 401(k) program often turn to options like Individual Retirement Accounts, as these opportunities can be greatly helpful concerning retirement planning and investing. However, recent changes in conversion penalties and fees have many considering changing their traditional IRA to a Roth IRA account, as the taxes which may be levied against this conversion can be paid out over the next two years and, for some, a Roth IRA may be more beneficial.
Yet, individuals who are considering investing in a Roth IRA often decide to choose this retirement plan or convert from another plan simply because any earnings from this account can be withdrawn without a tax penalty provided certain conditions are met by the investor. However, there are some investors who have chosen to remain with a traditional IRA plan due to certain tax advantages as well.
Investors in a traditional IRA, while they may be taxed on earnings and there is a required distribution associated with these forms of retirement, any contributions which are made by the investor may be written off of one’s income. As an example, if someone who makes $30,000 a year and contributes $2,000 to a traditional IRA, they can claim only $28,000 on their income taxes. While this is a simple example, many feel that the savings from an IRA at the present time will outweigh savings on taxes later, when withdrawals begin.
A Roth IRA doesn’t allow for deductions from contributions, but again, many simply turn to Roth accounts to save later in life. Yet, the question has arisen from many investors as to which account will be best.
Many financial advisers have traditionally counseled investors by looking at their goals and their financial situation. Obviously, there are investors who simply have no idea what they need, want, or even what options they may have when it comes to investing, so the choice of the right retirement account is something that may take research on the part of an investor or a counseling session with a financial adviser.
While options like IRAs are popular, 401(k) plans are used as a way to build one’s retirement nest-egg as well, and there are different benefits from these investments as well. However, when it comes to planning for one’s retirement, those who may have no clue as to which plan will be their best option are usually those who need to heavily evaluate their financial position, goals for retirement, and the pros and cons of these retirement plans.
There have been options for converting retirement plans to Roth IRAs, due in part to their popularity but this, again, is something that needs to be researched as there are many financial counselors who point out that, for some, converting at a certain point will not be beneficial and the costs of converting could outweigh any benefits from a Roth IRA.