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Difference Between Traditional IRA and Roth IRA Rules
There are two main types of IRA. These are Roth IRA and traditional IRA. Though both IRA has great potentials in making your savings grow, a person who plans to set up an IRA account must be aware of the different rules that govern each type. The rules that surround both types of IRAs are mostly the same. However there are some differences that would greatly affect your savings. It is important to know these differences so that you will be able to choose effectively which type of IRA will be best for your current situation.
You should pay particular attention to the IRA withdrawal rules of both traditional and Roth IRA. There are quite a few differences between the IRA withdrawal rules for each account. You should be aware of these rules so that you will determine whether a certain withdrawal will be subjected to taxes, penalties or both.
The first difference between traditional IRA and Roth IRA rules is the withdrawal of principal contributions. In Roth IRA contributions can be withdrawn anytime and it is free of taxes. This is because Roth IRA contributions are non-tax deductible which means that the account holder is required to pay the taxes directly. On the other hand, withdrawals on contributions and earnings are only allowed when the account holder reaches the age of 59 ½ in traditional IRA.
Withdrawal of earnings in both traditional and Roth IRA can be a little bit complicated. In traditional IRA taxes are applied to the earnings of the account and it is impossible to withdraw the earning tax free. Roth IRA on the other hand allows the account holder to withdraw the earnings tax free given that the individual has reached the minimum age requirement for withdrawals. He also needs to satisfy the five year rule imposed by the Internal Revenue Service.
Hopefully, y knowing the major differences between these two types of IRA, you will be able to find the best IRA type for your current situation. No matter what type it is, whether it is traditional or Roth IRA, it is best that you know the IRA withdrawal rules for both types.