Traditional vs Roth IRA
Individual Retirement Account. That’s what IRA stands for.
What’s the difference between a Traditional IRA and a Roth IRA?
The biggest difference has to do with taxability.
For a Traditional IRA, you are deferring the tax liability until you start taking distributions. Which means you may be able to deduct your contributions now and pay the taxes later on whenever it is you start taking distributions. Depending on the tax-bracket you are in when you take your distributions you could pay less, breakeven, or pay more in taxes.
Roth IRAs, you are paying taxes based on your current tax bracket. When you start taking distributions from this account, your earnings will be tax-free as long as it has been five (5) years since you first made contributions. Which means, you aren’t paying any income tax on it. Your contributions can always be taken out at anytime without penalty or taxes.
Both types of accounts have other rules and regulations you will want to be aware of before opening because it may be in your best interest to do one instead of the other. Consulting with a Financial Advisor would be the best option to determine which account is in your best interest.
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