A Roth IRA and a traditional IRA are both types of individual retirement accounts that allow you to save and invest money for retirement. However, they differ in how and when they are taxed.
With a Roth IRA, you contribute money that has already been taxed (post-tax income), so you don’t get a tax deduction when you make the contribution. However, your money grows tax-free and you can withdraw it tax-free after age 59½, as long as you have had the account for at least five yearsAd12.
With a traditional IRA, you contribute money that has not been taxed yet (pre-tax income), so you can deduct your contributions from your taxable income in the year you make them. This lowers your current tax bill, but your money grows tax-deferred and you have to pay taxes when you withdraw it in retirementAd12.
The choice between a Roth IRA and a traditional IRA depends on several factors, such as your current and expected future income, your tax bracket, your retirement goals, and your eligibility for each type of account. Some general guidelines are:
- A Roth IRA may be better if you expect your income and tax rate to be higher in retirement, you want more flexibility in accessing your money, or you want to leave tax-free assets to your heirsAd12.
- A traditional IRA may be better if you expect your income and tax rate to be lower in retirement, you want to lower your current tax bill, or you plan to convert to a Roth IRA laterAd12.
You can also use a Roth IRA vs. Traditional IRA calculator to compare the potential outcomes of each option based on your personal situation.
I hope this helps you understand the difference between a Roth IRA and a traditional IRA.