A comparison between Roth and traditional IRAs

Roth and traditional IRAs share a lot of similarities, with the fundamental difference between the two involving the payment of taxes. 

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In a traditional IRA, individuals take their contributions out of their pretax income and the investment grows with the incurred taxes deferred until money has been withdrawn. 

On the other hand, Roth IRA, which was named after former Senator William Roth who authored the Taxpayer Relief Act of 1997, is funded after an individual’s salary has been taxed. Contributions are not tax deductible and qualified distributions when withdrawing from the account is tax free. 

Because of this difference in tax treatment, contributors would have to consider carefully which account to use. 

The tax rate is shifting continually. If they believe that the rate would be higher than it is now, they should consider opting for a Roth IRA because future withdrawals are tax free and they would not have not deal with higher-than-expected liability. But if they think the tax rate would not increase that much, traditional IRA may be the better choice and and income tax can just be paid down the road.

Another important factor to think through is early withdrawals. In a traditional IRA, if money is taken out before the individual has turned 59-and-a-half years old, there is a ten-percent early-withdrawal penalty. But with a Roth IRA, taxes have already been paid in the course of contributing, allowing early withdrawal without penalties. 

Image source: usmoneyreserve.com

For more discussion on IRA, follow this Barry Bulakites Facebook page.

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