The Individual Retirement Account (IRA) and the Roth IRA are two types of tax-advantaged retirement savings accounts in the United States.
Both were introduced by the government to encourage individuals to save for retirement.
They offer various tax benefits to help people grow their retirement savings over time, although the tax treatment of contributions and withdrawals differs between the two types of accounts.
1.. Traditional IRA:
The traditional IRA was created by the Employee Retirement Income Security Act (ERISA) of 1974.
The primary goal of the legislation was to protect private-sector employees' retirement benefits and provide a tax-advantaged savings vehicle for individuals who did not have access to employer-sponsored retirement plans, such as pensions or 401(k)s.
In a traditional IRA, individuals can make tax-deductible contributions, meaning that the contributions can be subtracted from their taxable income for the year in which they are made.
The investments within the account grow tax-deferred, which means that taxes are not due on the earnings until the funds are withdrawn during retirement.
Withdrawals from a traditional IRA are generally treated as ordinary income and taxed accordingly.
2. Roth IRA:
The Roth IRA was established by the Taxpayer Relief Act of 1997 and is named after its chief legislative sponsor, Senator William Roth of Delaware.
The Roth IRA was designed to provide an alternative to the traditional IRA, with different tax advantages that could be more beneficial for certain individuals.
Contributions to a Roth IRA are made with after-tax dollars, meaning that they are not tax-deductible.
However, the investments within the account grow tax-free, and qualified withdrawals made during retirement are also tax-free.
This feature can be particularly beneficial for individuals who expect to be in a higher tax bracket during retirement compared to when they are contributing.
Both traditional and Roth IRAs are subject to annual contribution limits set by the IRS, which are adjusted periodically for inflation.
In general, individuals can start withdrawing funds from their IRA accounts without penalty after they reach the age of 59 and a half.
Early withdrawals may be subject to taxes and penalties, although there are some exceptions for specific situations, such as first-time home purchases or higher education expenses.
In conclusion, the history of IRAs and Roth IRAs reflects the U.S. government's efforts to encourage retirement savings among its citizens.
Both types of accounts offer unique tax advantages that can help individuals build their retirement nest egg over time.
Choosing between a traditional IRA and a Roth IRA depends on factors such as current and expected future income, tax rates, and individual financial goals.
Resources:
"The Employee Retirement Income Security Act of 1974 (ERISA)" - U.S. Department of Labor
"The Taxpayer Relief Act of 1997" - U.S. Congress
"IRAs, Roth IRAs and the Conversion Decision for Americans Living Abroad" by David Kuenzi
"The Total Money Makeover" by Dave Ramsey
"The Bogleheads' Guide to Retirement Planning" by Taylor Larimore, Mel Lindauer, Richard A. Ferri, and Laura F. Dogu
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