If you've started investing your income for retirement, IRA's and Roth IRA's are types of accounts you may have heard about. Though the mechanics of how they work may not be as familiar, so let me give a quick refresher course.
IRA stands for Individual Retirement Account. Traditional IRA accounts allow you to set money aside and grow investment earnings with deferred taxes. Deferring taxes is another way of saying you pay the taxes later. Specifically, you won't have to pay taxes on the money until you take money out of the account in retirement (known as distribution). When you put money into your IRA, you've already paid your portion of tax on that income, so you deduct the amount you contribute that year from your taxes.
A Roth IRA is also a retirement account, but unlike your traditional IRA, your contributions to your account are not deductible from your taxes. However, the earnings you make in your Roth are tax free. That means when you enter retirement and start drawing out your money, if certain conditions are met, you don't pay taxes!
With only the information above, a Roth IRA seems like the ideal choice. However, there are limitations to the amount you can contribute to your Roth, and if you make over $120,000 or $186,000 as a married couple, you can't contribute to a Roth at all!
"Okay, fine," you say, "I'll just contribute the rest of my excess earnings to my traditional IRA."
Nope. Again, you're restricted to contributing an annual maximum of $5,500 - $6,500, depending on your age.
Well how can you maximize your tax deferred and tax-free retirement earnings?!
Kiel VanderVeen, CFP® explains it all in this video: