Don’t wait to take charge of your future financial health. Setting up an IRA account allows you to save for retirement in a way that uses either tax-free growth, or tax-deferred growth.
That means…an account with tax-deferred growth will earn tax-free interest while it remains in the account.
Taxes will be paid on the earnings when the money is withdrawn. With a tax-free account, you pay taxes on what is invested, but you will not have to pay taxes on what you withdraw.
If you think you may end up in a higher tax bracket when you retire, a Roth IRA (usually tax-free) may be the choice for you. If not, then consider a (tax-deferred) Traditional IRA. If you’d like to set aside funds for the educational purposes of children under 18,1 try saving with a Coverdell IRA.
Compare IRA Accounts
| Types of IRAs | Traditional IRAs | Roth IRAs | Coverdell IRAs |
|---|---|---|---|
| What type of funds does it use? | Pre-tax dollars up to $6,500 (or $7,500 if the investor is age 50 or older) | Taxed income up to $6,500 (or $7,500 if the investor is age 50 or older) | Taxed income up to $2,000/year |
| Tax rate that most influences earnings | Tax rate at retirement age or time of withdrawal | Tax rate at time of deposits | Tax rate at time of deposits |
| When is it taxed? | At retirement age | Taxes on earnings may be subject to a 5-year holding requirement. If you’ve owned the IRA for longer than 5 years and are over age 59-1/2 you can withdraw funds from a Roth IRA without penalties or taxes. | Account earnings are tax-free if used for educational purposes on beneficiaries that are under the age of 30.2 |
| Are eligible contributions tax deductible?2 | Yes3 | No | No |
1An exception may be granted if the beneficiary over the age of 30 is an individual with special needs.
2Contributions limits may vary and will depend on the investor’s individual income level.
3Subject to income limitations.
