Let’s put this in drinking terms.  Taxes are a hangover.  A Roth IRA gets the hangover out of the way before the drinking even commences because the money contributed is taxed before the contribution.  A Traditional IRA let’s you drink first and the hangover comes later because the money is taxed once it’s withdrawn.

How should you decide when you want to suffer your hangover?  A very simple way to determine is whether or not you receive a tax refund.  If you get money back, do a Roth.  You likely are in a lower income bracket and don’t need the tax deduction.  A lot of young people with years ahead to work and invest will fall into this category.  If you’re older, making more and in a higher tax bracket, a Traditional IRA will give you that deduction that may drop you into a lower bracket.

A Roth IRA also has the advantage of having no penalties for early withdraw on the principal.  This makes a Roth a good place to invest your emergency fund.  If you pull out any gains, there will be penalties but not on the initial investment.

What is the difference between an IRA and a 401K?  A 401K is an employer sponsored program.  For those whose employer does not offer a 401K or are self-employed, an IRA can be set up by an individual and serve as your retirement account.

A SEP-IRA is something for self-employed individuals to consider as well.  You can contribute up to $52,000 a year depending on income.  A SEP-IRA can be opened with a brokerage firm or an on-line investment account.

How’s that for a simple break down?  Putting things in drinking terms makes everything easier to understand!

Show Notes

Beer Money: A Beer Drinker’s Guide to Personal Finance and Investing:  Darin’s easy to understand book on managing your money.

Get Beer Money:  Darin’s website.

Ommegang Hennepin: A rustic golden ale.

Blindfold Black IPA: A light bodied IPA with a bold, hoppy character.