The main difference between a Roth IRA and a traditional IRA is when you pay taxes on the money you contribute:
– With a Roth IRA, you pay taxes on the money you contribute up to the contribution limit in the year you contribute it. You don’t pay any taxes when you withdraw the money from the Roth IRA in retirement.
– With a traditional IRA, you don’t pay taxes on the money you contribute up to the contribution limit in the year you contribute it. However, when you withdraw the money from the traditional IRA in retirement, you will have to pay taxes on it.
A Roth IRA is better if you think your tax rate will be higher in retirement because you can save money for retirement while paying a lower tax rate. Because of this, some experts say that the main difference between the two types of IRAs is that with a Roth IRA, you pay taxes now instead of later.
If you think you will have a lower tax rate when you retire, however, a traditional IRA may be better. This is because your withdrawals would be taxed at the lower rate instead of at whatever your current income-tax rate is.
Taxes are not the only difference between Roth IRAs and traditional IRAs. Another notable difference is that with a Roth IRA, you are not required to start withdrawing your money at a certain age. With a traditional IRA, you have to start withdrawing your money by April 1 of the year after you turn 70½ years old.
As with any financial decision, it is important to weigh the pros and cons of each choice. For example, some experts say that if you think your tax rates will be equal in retirement and you won’t need to withdraw the money for many years, a Roth IRA may be better.
However, some experts say that if you don’t think taxes will increase within the next decade or two (because of recent changes made by President Donald Trump), then a traditional IRA is better.
As with most things, there isn’t a one-size-fits-all answer to which IRA is better:
It is important to do your research and make the decision that best fits your financial situation. As you can see, traditional versus Roth IRA is not an issue of right or wrong; it’s about what will work best for a particular person at a particular time.
– Roth IRA: You pay taxes on the money you contribute up to the contribution limit in the year you contribute it, you don’t pay any taxes when you withdraw the money from the Roth IRA in retirement.
The tax advantages of a traditional IRA are in the form of a tax deduction for contributions. Money contributed to a traditional IRA is deductible from your income taxes. You can take a traditional IRA deduction regardless of whether you participate in an employer-sponsored retirement plan such as a 401(k). Your adjusted gross income determines whether you can deduct your contributions.