With a Roth IRA, you contribute money after taxes, your money grows tax-free, and you can generally make tax-free and penalty-free withdrawals after age 59 and a half. With a traditional IRA, you contribute money before or after taxes, your money grows with deferred taxes, and withdrawals are taxed as current income after age 59 and a half. With a Roth IRA, you can leave the money there for as long as you want and let it grow and grow as you age. With a traditional IRA, on the other hand, you should start withdrawing money when you turn 70 and a half years old.
With traditional IRAs, you delay paying any taxes until you withdraw the funds from your account later in retirement. However, with Roth IRAs, you pay taxes in advance by contributing money after taxes, and later on, when you retire, your withdrawals are tax-free (as long as your account has been open for at least five years). Traditional IRA contributions are tax-deductible on state and federal tax returns for the year in which you make the contribution. A key consideration when deciding between a traditional and a roth ira is how you think your future income (and, by extension, your income tax bracket) will compare to your current situation.
Then, when you withdraw money in the future, traditional IRAs entail tax liabilities on anything that isn't taxable (deductible contributions and investment gains), while Roth IRA withdrawals are tax-exempt. Most brokerage firms act as custodians of both Roths and traditional IRAs with the same minimums, fees and conditions for each. If you've been contributing to a traditional IRA for all those years, the government will be waiting for your part. The more time you have between now and retirement, the more the prospect of tax-free compound growth in a Roth IRA will stand out as a major differentiator.
IRAs are easy to set up and accessible and are offered at most banks and credit unions, as well as through online brokers and investment companies. Traditional IRAs are generally more effective if you expect to be in a lower tax bracket when you retire, while Roth IRAs are best for people who are in a lower tax bracket today. While many providers offer traditional and Roth IRAs, some stand out better among those seeking to open a Roth IRA because they are attractive to young investors. You can set up automatic contributions to your IRA from your checking or savings account, making investing for your future one less thing to think about.
Traditional IRAs and Roth IRAs are the two most popular types of retirement accounts, but they have significant differences that any investor should consider before choosing which one to open. Unlike a traditional IRA, you can withdraw sums equivalent to your Roth IRA contributions without penalty or taxes at any time and for any reason, even before age 59 and a half. However, beyond the tax implications, there are more things to consider when choosing between a traditional IRA and a Roth IRA. If you withdraw money from a traditional IRA before age 59 and a half, you'll pay taxes and a 10% early withdrawal penalty.