One Snarky Chica with Issues

If you are just starting out with your retirement planning then you know that you have two types of IRAs to choose from. You can either go with a Traditional IRA or you can go with a Roth IRA. One type is not always better than the other. In fact, the best IRA is different for each person. So, what is the basic difference between the Traditional and the Roth IRA?

Traditional IRA

With a traditional IRA, earnings on your contributions are tax-deferred. That means that you do not pay taxes on them until you withdraw your assets in retirement. By then, you may be in a lower tax bracket which is why some people prefer the traditional over the Roth.

With a Traditional IRA, you must begin taking distributions when you reach age 70½.

Also, you might be able to deduct part or all of your contribution from your income taxes, depending on your income. And when you retire your withdrawals are taxed as ordinary income upon retirement, when you may be in a lower tax bracket. Withdrawals can begin at age 59½ with no IRS penalties. However, there are some exceptions that allow early withdrawal without penalty.

Roth IRA

With a Roth IRA, earnings on your contributions are tax-free. That means that you do not pay taxes on them at all when you withdraw your assets in retirement. So, if you expect to be in a high tax bracket in retirement, the tax savings can be substantial. And that is why some people prefer the Roth over the traditional.

Contributions to a Roth IRA are never tax-deductible.

With a Roth IRA, you are never required to take withdrawals. And you can withdraw contributions at any time without worrying about taxes or penalties. Withdrawals of your earnings can begin at age 59½ with no IRS penalties. However, there are some exceptions that allow early withdrawal without penalty. Note that income tax on earnings will apply if you have held the account for less than five years.