What’s the Difference Between a Roth IRA and a Traditional IRA?

IRA stands for “individual retirement account.” There are two basic types – Roth and Traditional. Each has some similarities and also some differences that may make one more advantageous than the other depending on your situation. First, some similarities. Both types allow for investment into tax-saving accounts for retirement purposes. Both have contribution deadlines that fall at the same time as tax return filing deadlines. Neither has an age restriction for how old you have to be to set one up.

There are also some key differences. You can withdraw from a Roth IRA at any time without incurring a tax penalty, but money withdrawn from a Traditional IRA before turning age 59 and ½ will be taxed. Traditional IRA’s do not place any contributions restrictions based on level of income, while Roth IRA’s do. The amount you can contribute decreases if you have a certain threshold income. Another key difference is whether the money goes into the IRA post-tax. With a Roth IRA, your money goes in after it has been taxed. However, when you withdraw from the money, later on, it won’t be subject to a tax. A Traditional IRA is an opposite – the money is not taxed going in, but you pay taxes on the entire amount at withdrawal. This can pose a disadvantage because the money withdrawn has likely accrued and increased through the investment account, resulting in a tax on a larger sum of money.

There are lots of different angles to consider in deciding which type of IRA to invest in. The professionals at The Center for Financial, Legal, and Tax Planning, Inc. are more than knowledgeable in regards to IRA accounts. Please contact us at (618) 997-3436 for more information.