When you first graduate from college, you realize that you are a full-grown adult. Now you’re going to have to find a job, find a place to live, and start paying bills. But what should you do with your source of income? Save it for a vacation? Invest with it? If so, invest in what?

As you get older, you realize some of the necessities you need to have for your future. Once you become a dependent, you slowly understand the concept of saving money, obtaining health insurance, and other tasks that you need to do to have a healthy lifestyle. One of these responsibilities is opening up a retirement account, so you can live a comfortable life after leaving the workforce. When you decide to open an account you see that there’s a regular IRA and a Roth IRA. Which one should you choose?

Well that all depends on your situation and preference. Although both accounts have the same goal, they have different methods of reaching that objective. This article will breakdown both the traditional IRA and Roth IRA to give you a better understanding of how they function.

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Traditional IRA

  • Age Limit? You need to be under the age of 70.5 with a source of income
  • Income Limit? There is no income cap limit for you to contribute
  • Contribution Limit? You can contribute up to $5,500 if you’re under 50, and $6,500 if you’re 50 or older
  • Withdrawal Rules? Pre-tax contributions and earnings are taxed when withdrawn but account is tax deductible
  • Distributions? You HAVE to take distributions(RMDs) after the age of 70
  • Withdrawal Penalties? There is an additional 10% tax penalty on early withdrawals (before the age of 60)
  • Extra Benefits? Contributions can qualify you for other tax incentives like child tax credit. Offers up to $10,000 penalty-free withdrawal to purchase your first home, but taxes are due on distributions

Roth IRA

  • Age Limit? There are no age restrictions to open an account
  • Income Limit? Single filers must earn less than $131,000; joint filers must earn less than $184,000
  • Contribution Limit? You can contribute up to $5,500 if you’re under 50, and $6,500 if you’re 50 or older
  • Withdrawal Rules? Never pay taxes on withdrawals
  • Distributions? No RMDs or withdrawal requirements
  • Withdrawal Penalties? There is an additional 10% tax penalty for unqualified withdrawal of earnings
  • Extra Benefits? After five years, contributions can be withdrawn tax-free. Offers up to $10,000 penalty-free withdrawal to purchase your first home, tax-free

Now that you understand the basic overview of the traditional IRA and Roth IRA, make sure to decide which retirement account is the right choice for you. Do you want to pay taxes now or later? Are you filing jointly or by yourself? These are only a few questions you should consider when deciding. Either way, whichever account you choose, you’ll be better off than those who open their retirement account way later than you.

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