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Investing w/ Tax Benefits

Updated: Mar 25

Investing in the stock market is one of the best ways to grow wealth. What's even better is investing in the stock market and receiving tax incentives through the investment accounts.

Two investment accounts that could potential do this are a traditional IRA and a Roth IRA.

A traditional IRA is a type of retirement account. The traditional IRA is known for the ability to make contributions to the plan on a tax-deductible basis. This is great for people who are looking to reduce their taxable income when it comes time to file their taxes.

With traditional IRAs, you aren’t able to withdraw any of your money until age 59 ½. If you withdraw before then, expect to pay a 10% withdrawal penalty on top of being taxed at your income tax rate at the time. This plan is typically most beneficial for the people that are taxed at a high-income tax-rate as they will be able to skip paying high taxes on their investments now to withdraw their money at a lower income tax rate in their retirement.

Then, we have a Roth IRA. Roth IRAs are known for the ability to pay taxes on the investments in the IRA now and withdraw from the account on a tax-free basis later. Similar to the traditional IRA, you will typically be penalized and taxed for early withdrawals. However, sometimes withdrawals can avoid being penalized if the money is being used for purchasing your first home, for example. Roth IRAs are most beneficial for people that are currently being taxed at a low-income tax rate and are looking to withdraw their money tax-free when they hit age 59 ½.

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Article: https://www.nerdwallet.com/article/investing/roth-or-traditional-ira-account