The main difference between a Roth and a Traditional IRA is the moment in time that you pay taxes on your contributions and earnings. With a Traditional IRA, you make contributions with pre-tax dollars, which means you get a tax deduction for the amount you contribute on your tax return. The money in the account grows tax-deferred, meaning you don’t pay taxes on any earnings until you withdraw the money in retirement. At that point, you’ll pay taxes on the amount you withdraw as ordinary income.
On the other hand, with a Roth IRA, you make contributions with after-tax dollars, which means you don’t get a tax deduction for your contributions. However, the money in a Roth IRA grows tax-free, and withdrawals in retirement are also tax-free. This can be a huge advantage, as it means you won’t owe taxes on the money you withdraw from the account in retirement.
Another difference between the two types of IRAs is how they treat required minimum distributions (RMDs). Traditional IRAs require you to start taking RMDs at age 72, which means you must start withdrawing a certain amount of money from your account each year. With a Roth IRA, there are no required minimum distributions, which means you can leave the money in the account to grow tax-free for as long as you’d like.
Finally, there are income limits on who can contribute to a Roth IRA. If you make too much money, you may not be eligible to contribute to a Roth IRA at all. With a Traditional IRA, there are no income limits on contributions, although there are income limits on the tax deduction you can take for your contributions.
Overall, both Roth and Traditional IRAs have their advantages and disadvantages, and the right choice for you will depend on your individual circumstances and financial goals.