What is the difference between a Roth IRA and a traditional IRA?

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. A traditional IRA is an individual retirement account that offers tax-deferred growth and taxable withdrawals in retirement.

The biggest difference between a Roth IRA and a traditional IRA is the way they are taxed. Contributions to a Roth IRA are made with after-tax dollars, which means you have already paid taxes on the money you are contributing. With a traditional IRA, you make contributions with pre-tax dollars, which means you will pay taxes on the money you withdraw in retirement.

Another difference between Roth IRAs and traditional IRAs is the age at which you can begin taking distributions. With a traditional IRA, you must begin taking distributions at age 70 ̅, but with a Roth IRA there are no required minimum distributions, which means you can leave the money in your account to continue growing tax-free.

Roth IRAs also have income limits, which traditional IRAs do not. In order to contribute the maximum amount to a Roth IRA, your modified adjusted gross income must be below $139,000 if you are filing taxes as a single taxpayer, or below $206,000 if you are filing taxes as a married couple.

Whether a Roth IRA or a traditional IRA is better for you depends on your individual circumstances. If you think you will be in a lower tax bracket in retirement than you are now, a traditional IRA may be better for you because you will pay taxes at a lower rate when you withdraw the money in retirement. If you think you will be in a higher tax bracket in retirement, a Roth IRA may be better for you because you will have already paid taxes on the money you contribute.

Another factor to consider is the age at which you will begin taking distributions. If you think you will need the money in your account before age 70 ̅, a traditional IRA may be better because you can begin taking distributions without penalty at age 59 ̅. If you think you will not need the money in your account until after age 70 ̅, a Roth IRA may be better because you are not required to take distributions.

The income limits on Roth IRAs may also be a factor in your decision. If your income is too high to contribute the maximum amount to a Roth IRA, a traditional IRA may be a better option.

Ultimately, the best decision for you depends on your unique circumstances. Talk to a financial advisor to get help determining which type of IRA is best for you.