Mar 3

Question by Claudio F: What is the difference between a roth IRA and a normal investment account by a broker?
1. In both cases I can invest only after tax money.
2. I can withdraw my money whenever I want in both cases.
3. I can only contribute $ 5,000 per year in the roth IRA while I can contribute how much I want with a normal investment account.

So why would I choose to open a roth IRA instead of a normal investment account where I can invest how much I want?

Best answer:

Answer by S
Any growth experiened in a ROTH IRA account is not taxed. Nor is taxed when you withdraw the money.

With a standard investment you will be taxed when you realize any profit by selling the investment.

So take an example where you have a ROTH IRA and a standard investment. Both start at 10,000 and both grow by 10%, to 11,000.

When you withdraw your IRA (assuming no penalties for ealry with drawal), you will get the full $ 11,000

When you withrdraw the investment you will have to pay taxes on the $ 1,000 of growth, so maybe you walk away with only $ 10,700.

This difference could add up to a huge amount over the lifetime of a ROTH IRA

What do you think? Answer below!

one comment so far...

  • jeff410 Said on March 3rd, 2011 at 6:05 pm:

    In a Roth the earnings, dividends, interest and capital gains, grow tax-free. You have to pay taxes on all earnings in a regular brokerage account.

    You can withdraw your contributions penalty and tax free from a Roth, but not the earnings without paying taxes and penalties.

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