It is never too early to start thinking about retirement, and an IRA will most likely fit into that equation. So when it comes to retirement accounts, two types of IRAs are available – Roth and Traditional. There are differences between a Roth IRA and a Traditional IRA that you may wish to consider before making the investment. In a nutshell, the main differences between the two involve taxes. In order to maximize your investment, take this into account with your current and future finances.
Contributions in a Roth IRA are made with after-tax dollars and therefore are not tax-deductible. However, this means that if you ever borrow from this account, they will be tax-free. A Traditional IRA, on the other hand, is tax-deductible. The amount is taken from before-tax income, so if you ever withdraw from that account, you will owe taxes on that amount.
It may appear on the surface as if a Traditional IRA wouldn’t be as desirable come retirement since you will need to begin to pay taxes on those amounts. But the benefit of a Traditional IRA is that you are enjoying tax-deferred growth while it is building. That may be particularly appealing if you expect lower income in retirement so that you may maximize growth now and pay fewer taxes once retired.
The Roth IRA also has benefits that are very attractive. All qualified distributions from a Roth IRA are tax-free. This cannot be overstated enough, especially important in retirement. The money in your Roth IRA is yours and will not be touched by the IRS as long as it has been in the account for at least five years. Qualified contributions are those that fall into that category: aged five years.
Take some time to consider both types of retirement accounts as you plan for retirement.
Source: Money U.S. News