Individual Retirement Account (IRA) Overview

Anatomy of IRA and Methods of Opening One: 
1. It is a savings account and investing tool with big tax breaks, where you can have tax-free or deferred growth on your savings, in which you open up as an individual.
2. Traditional IRA – You pay taxes upon the withdrawal of the money
3. Roth IRA – You pay taxes upon contributions of your money and pay none upon withdrawal.
4. The government places limits on the allocation you can contribute. For example, for 2014 (for both Traditional and Roth) you are allowed to put up to $5,500 annually and if you are older than 50, you can contribute up to $6,500.
5. IRA’s can be open through the following mediums: Banks, Brokerage Firms, or Mutual Fund companies.
 
Difference Between Traditional and Roth: 
1. As stated before, the Traditional IRA is where you pay taxes upon withdrawal, where in the Roth IRA, you defer your growth, to not pay taxes upon withdrawal.
2. Traditional IRA requires you to be older than 18 but below 70.5 years of age, with “employment compensation”. Roth IRA requires you to be older than 18 with “employment compensation”.
3. Traditional IRA requires no income limits to make “contributions” to your account, where the Roth IRA requires a certain income in order for you to contribute. The income needed for the Roth is generally higher; the schedule is subject to change annually.
4. Traditional IRA penalties upon withdrawals (anything before 59.5 years of age) are subject to a 10% withdrawal fee. For the Roth IRA, penalties include taxation of earnings with a 10% additional tax fee.
5. Minimum required distributions (MRD) are amounts in that you are required to withdraw. For a traditional IRA, MRD’s begin at the age of 70.5 where the Roth is not subject to MRD’s.
6. With Traditional IRA you have the flexibility and savings of taxes, while not having to worry about double taxation. However, Roth IRA allows you to pay low taxes now relative to the future, it is willable, you’ll have lower tax income during retirement, and less stringent penalties upon early withdrawals.

Which One Should You Pick? 
This is contingent upon the individual. On a relative basis, a Traditional IRA has advantages and disadvantages compared to that of a Roth (and vice versa). Ultimately, if you as an investor is willing to pay taxes now (and you have the income eligibility), you should consider having a Roth IRA. Additionally, if you believe that your income would keep increasing until retirement, you would consider paying the lower tax now, rather than paying the higher tax bracket percentage upon retirement.

If you intend to not withdraw any amount upon the age of 59.5 and avoid penalties, you may consider a Traditional IRA. Moreover, if you intend to have less income at retirement relative to your current salary, the Traditional IRA may be more tax-efficient, by having to pay fewer taxes upon withdrawal (due to being in a lower tax bracket).

Takeaway: 
It is never too early to start saving for retirement. Please do consider opening up an IRA account, whether it be Traditional or Roth, to help better your economic self. ​