Differences Between Traditional and Roth IRAs

An Individual Retirement Account (IRA) is a type of retirement plan that allows individuals to save for their retirement in a tax-advantaged manner. There are two main types of IRAs: traditional IRAs and Roth IRAs.

One key difference between traditional IRAs and Roth IRAs is the way they are taxed. Contributions to a traditional IRA may be tax-deductible, depending on your income and whether you or your spouse is covered by a retirement plan at work. However, withdrawals from a traditional IRA are taxed as ordinary income.

On the other hand, contributions to a Roth IRA are not tax-deductible, but qualified withdrawals from a Roth IRA are tax-free. This means that you pay taxes on your contributions upfront, but you don’t have to pay taxes on your withdrawals in retirement.

Another difference between traditional IRAs and Roth IRAs is the age at which you are required to begin taking minimum distributions. With a traditional IRA, you are required to begin taking minimum distributions at age 72. With a Roth IRA, there is no requirement to take minimum distributions during the owner’s lifetime.

There are also differences in the income limits for contributing to traditional IRAs and Roth IRAs. For traditional IRAs, the ability to make tax-deductible contributions starts to phase out at higher income levels. For Roth IRAs, there are income limits that determine whether you are eligible to contribute at all.

In general, traditional IRAs may be a good option for people who expect to be in a lower tax bracket in retirement, while Roth IRAs may be more suitable for those who expect to be in a higher tax bracket in retirement. It’s important to consider your own financial situation and long-term retirement goals when deciding which type of IRA is best for you.