You may know what an IRA is, but how does the traditional IRA differ from a Roth IRA? A Roth IRA is an individual retirement account that offers tax-free income in retirement. Whereas a traditional IRA has a tax break up-front, the Roth IRA distributions are tax-free. With a Roth IRA, you can begin to contribute to the account at any age after you have begun to earn income from a job.
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Roth IRAs can be great for those who expect their tax rate to be higher during retirement than their current tax rate. Though taxes are taken out when an individual puts the money into the account, he or she can still benefit from decades of compounded growth that is tax-free. These retirement accounts also make sense for those who want to minimize their tax deduction in retirement or would like to leave tax-free assets to their family.
In addition to tax breaks, the Roth IRA offers individuals some flexibility in that they can withdraw contributions at any time, tax-free and without penalty. Though under normal circumstances, you need to hold the account for at least five years and be 59 ½ before you can access the earnings. Unlike traditional IRAs, Roth accounts do not have mandatory withdrawals, and you are still able to make contributions if you work in retirement.
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