IRAs (Traditional vs. Roth)

There are 2 main types of IRAs, Traditional and Roth.  The shortcut I use to try to remember their difference is to equate the word Roth with paying taxes nowThis word association will also be helpful when we talk about 401ks vs. Roth 401ks.

Whether a Traditional or Roth IRA is more advantageous for you will depend on factors like what other retirement plans you have and how much money you make.  Most of us millennials just starting out in our careers would probably benefit more from having a Roth IRA since we will (hopefully) be in a higher income tax bracket when we retire.  By using a Roth IRA, the trade off is we pay a smaller percent of taxes now rather than pay a larger percent of taxes later.

Traditional IRAs are the opposite – you don’t pay taxes until you take the money out at retirement.  However, the money that you put into the account is only completely tax-free if you qualify for a full deduction (i.e. if you make less than $59,000 in 2013).  If you make more than that, you will still have to pay taxes on part or all of the money that you put into your Traditional IRA.  BUT!  It will at least still grow tax-free.

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10 thoughts on “IRAs (Traditional vs. Roth)

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