Understanding the Differences between a Roth IRA and Traditional IRA
If you are considering a Roth IRA or Traditional IRA for retirement savings, it’s important to understand the differences and eligibility limitations for each. The biggest distinction between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable. In comparison, contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free. Below are the other main differences between traditional and Roth IRAs.
In summary, with traditional IRAs, you deduct contributions now and pay taxes on withdrawals later; with Roth IRAs, you pay taxes on contributions now and get tax-free withdrawals later. Traditional IRAs function like personalized pensions: In return for considerable tax breaks, they restrict and dictate access to funds. Roth IRAs function more like regular investment accounts, only with tax benefits: They have fewer restrictions, but fewer breaks as well. Whether you think your annual income and tax bracket will be lower or higher in retirement is a key factor in determining which IRA to choose.
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