IRA stands for Individual Retirement Account, and it is a type of investment account that individuals can use to save for retirement. There are two main types of IRAs: Traditional IRA and Roth IRA.
The key difference between a Traditional IRA and a Roth IRA is how they are taxed. Traditional IRA contributions may be tax-deductible, which means that the money you contribute to the account reduces your taxable income in the year you make the contribution. However, when you withdraw money from a Traditional IRA in retirement, you’ll have to pay taxes on both your contributions and your earnings.
On the other hand, Roth IRA contributions are made with after-tax dollars, which means that you don’t get a tax deduction in the year you make the contribution. However, when you withdraw money from a Roth IRA in retirement, you won’t have to pay taxes on either your contributions or your earnings.
Another difference is that Traditional IRAs have required minimum distributions (RMDs) that you must take once you reach age 72, while Roth IRAs do not have RMDs.
In summary, the main difference between a Roth IRA and a Traditional IRA is the way they are taxed. With a Traditional IRA, you may get a tax deduction upfront but pay taxes on withdrawals in retirement. With a Roth IRA, you don’t get a tax deduction upfront but can withdraw contributions and earnings tax-free in retirement.
Click here to learn the best time to open and start contributing to an IRA
Pingback: Part 6: Retirement Planning – The Dime Jar