Traditional and Roth IRA's look very similar: they offer a tax advantage and are both funded with post-tax dollars. But their big difference is how your contributions are taxed when you make them - and how they're taxed when you withdraw the money in retirement.
A Traditional IRA allows you to defer taxes on your savings until withdrawal, which means that all of your earnings can grow tax-deferred inside the account. Withdrawals are taxed as income. Roth IRA contributions, on the other hand, are made with after-tax dollars - which means you pay taxes upfront. But when you withdraw money in retirement, it's tax-free .
Traditional IRA’s have an up front tax deduction while Roth IRA’s don't; however you will not pay taxes on the money when you withdraw it from a Roth IRA.
A Traditional IRA lets you deduct your contributions from your taxable income for that year, lowering your total tax bill. However, when you start withdrawing money in retirement, those withdrawals are taxed as regular income.
Roth IRAs don't offer an up front deduction. But qualified withdrawals after age 59 ½ are 100% tax free.
IRAs, both Traditional and Roth, let you defer taxes on your savings until retirement . With a traditional IRA , withdrawals in retirement are taxed as income. Roth IRAs offer no up-front tax deduction, but qualified withdrawals are 100% tax free. That cliff at age 70 ½? Gone like last night's forgotten dream.
If you want my advice about which one is right for you, I suggest figuring out whether or not your income will be higher in the current year or later on when you retire. If it's going to be higher during your working years, contribute to a Traditional IRA and receive the tax deduction now. If you think your income will be higher in retirement or you expect to be in a lower tax bracket during retirement, contribute to a Roth IRA and receive no deduction now but make withdrawals later without paying income tax .
Roth IRA's come with some eligibility restrictions. To contribute the maximum amount each year ($5,500 if you're under 50), your modified adjusted gross income can't exceed certain limits.
Like traditional IRA's, Roth IRAs come with an annual contribution limit ($5,500 if you're under 50). But Roth IRA's have stricter eligibility rules for contributions if your employer offers a retirement plan - for example, a 401(k) or 403(b).
If your employer offers a retirement plan and your income is above certain limits, you can't contribute to a Roth IRA.
Roth IRA's are an attractive option for young people who think they may be in a higher tax bracket when they retire than they are now. If that's the case, then it makes sense to pay taxes on your contributions now at your current, presumably lower tax rate.
Roth IRA's are all about giving up now (a tax deduction) for later (tax-free withdrawals). If you think your income will be higher now but lower in retirement, the tradeoff may be worthwhile.
It may make sense to open a Roth IRA if you're young and think your income will be higher now but lower later in life. A Roth IRA lets you pay taxes on your contributions now at today's presumably lower tax rates, but withdrawals are 100% tax-free in retirement.
Withdrawals from traditional IRAs are taxed as income. Withdrawals from Roth IRAs are not taxed .