what is the difference between a roth ira and a traditional ira

A Roth IRA is funded with after-tax money, so qualified withdrawals in retirement are tax-free; a traditional IRA may give you a tax break now, but withdrawals are generally taxed later. Roth IRAs also have no required minimum distributions for the original owner, while traditional IRAs do after age 73.

Main differences

Feature| Roth IRA| Traditional IRA
---|---|---
Contributions| After-tax dollars| Often pre-tax, if you qualify for the deduction
Tax benefit| Tax-free withdrawals later| Tax deduction now, if eligible
Withdrawals in retirement| Qualified withdrawals are tax-free| Withdrawals are usually taxed as ordinary income
Required minimum distributions| None for original owner| Required starting at age 73
Income rules| Income limits apply to contribute| Anyone with earned income can contribute, but deductibility can be limited 127

Which one fits better

• Choose a Roth IRA if you expect to be in a higher tax bracket later, or you want tax-free withdrawals in retirement.

• Choose a traditional IRA if you want a tax deduction now and think your tax rate may be lower when you retire.

• If you want flexibility, some people use both, as long as total annual contributions stay within the IRS limit.

Simple example

If you put money into a Roth IRA, you pay taxes before the contribution, then qualified retirement withdrawals are tax-free. If you put money into a traditional IRA and get a deduction, you may save on taxes now, but you pay tax when you withdraw the money later.

TL;DR: Roth = pay taxes now, enjoy tax-free withdrawals later; traditional = possibly get a tax break now, pay taxes later.