BATTLE OF THE IRAs CALCULATOR
Want to become a millionaire someday 💲📈? Two major ways to invest your money to build wealth are two Individual Retirement Accounts: TRADITIONAL IRA and ROTH IRA. You can open just one or both!
In life, we all have to pay TAXES eventually. Both accounts provide TAX ADVANTAGES while growing your money, but the biggest differences are 1. which you qualify for based on your income and 2. how and when you get a tax break.
Now, let's see how much your savings can grow and which IRA wins in the end!
What is your age and income?
You can open a traditional IRA and Roth IRA at any age as long as you make money from a job or self-employment. If you are below 18, you may need your parent or guardian's help.
To qualify for a Roth IRA, you must make less than $140,000 per year before taxes. On the other hand, there is no income limit for a Traditional IRA! However, these differences influence tax breaks.
RULES FOR CONTRIBUTING MONEY
For both traditional and Roth IRAs, you can contribute up to $6,000 per year if you are under the age of 50, and you can add money anytime. If you decide to open up both accounts, you can, but the limit is $6,000 combined!
RULES FOR WITHDRAWING MONEY
The rules for withdrawing money differ for Traditional IRAs and Roth IRAs.
Let's start with early withdrawals. For traditional IRAs, early withdrawals before the age of 59½ are taxed as income and usually have a 10% penalty. Similarly, withdrawals from a Roth IRA may have some taxes and penalties on earnings depending on what you use the money for.
Now, let's move onto regular withdrawls after the age 59½. For a traditional IRA, these withdrawals are taxed at your retirement tax rate. On the other hand for Roth IRAs, if you have been contributing money for 5+ years, withdrawals are 100% tax-free, penalty-free, and can be taken out anytime!
BOTTOM LINE: Set this money aside to grow more wealth in the long-run 🔥💲📈.
BATTLE OF THE IRAs: TAX ADVANTAGES
Traditional IRAs and Roth IRAs provide different tax advantages to help you grow your wealth.
Roth IRAs grow Tax-Free: When you contribute to a Roth IRA, you still have to pay taxes on that money. However, you pay no taxes on money you withdraw during retirement! This makes sense if you expect to pay more taxes in retirement than you do now.
Traditional IRAs are Tax-Deferred: When you contribute to a traditional IRA, you get an upfront tax break, meaning that you pay less taxes for that year. However, you'll pay income taxes on withdrawls during retirement. This makes sense if you have pretty high income (and may not qualify for a Roth) and expect to pay less taxes in retirement.
Would you rather pay taxes sooner or later? Take a second to think about the pros and cons of each tax advantage.
What is your risk tolerance?
How you invest your money (examples: stocks, bonds, mutual funds, ETFs) impacts how much your money grows.
The RISK/RETURN TRADE-OFF is that the more aggressive risk you take on, the greater your Rate of Return (RoR) and reward if the investment makes money. On the other hand, if you only take a small risk, you will get a smaller reward. Your RISK TOLERANCE is a personal choice!
For example, if you invest in Coinbase Stock 💰, you may see the value of your account take dips at times. This is okay for IRAs since if you do not need the money here in the near future and want it grow more in the long haul.
Compounding Interest... 💲💲💲
Traditional IRAs and Roth IRAs utilize COMPOUNDING 📈, which enables your money grows quickly especially when you start early.
Now, let's see how their balance grows over time and see who won the Battle of the IRAs based on your inputs!