A traditional IRA is a tax-deductible account. This means that you can deduct your contributions from your taxable income in the year that you make them. Your money grows tax-deferred, meaning that you won’t pay taxes on the earnings until you withdraw them in retirement.
A Roth IRA is not tax-deductible, but your withdrawals are tax-free in retirement. This is because you pay taxes on your contributions before you put them in the account.
Which is right for you?
The best way to decide which type of IRA is right for you is to consider your current tax situation and your expected retirement income. If you are in a high tax bracket now, a traditional IRA may be a better option. If you expect to be in a lower tax bracket in retirement, a Roth IRA may be a better option.
Here are some additional things to consider when choosing between a traditional IRA and a Roth IRA:
- Your current tax bracket: If you are in a high tax bracket now, a traditional IRA may be a better option. This is because you can deduct your contributions from your taxable income, which will lower your tax bill.
- Your expected retirement income: If you expect to be in a lower tax bracket in retirement, a Roth IRA may be a better option. This is because your withdrawals will be tax-free in retirement.
- Your age: If you are close to retirement, a traditional IRA may be a better option. This is because you will have more time for your money to grow tax-deferred.
- Your risk tolerance: If you have a high risk tolerance, you may want to consider a Roth IRA. This is because your money will grow tax-free in retirement, and you will not have to worry about paying taxes on your earnings until you withdraw them.
Here are some additional tips for choosing an IRA:
- Get information from multiple sources. There are a number of resources available to help you learn more about IRAs, including the IRS, the Financial Industry Regulatory Authority (FINRA), and the Consumer Financial Protection Bureau (CFPB).
- Talk to a financial advisor. A financial advisor can help you understand the pros and cons of IRAs and answer your questions.
- Get everything in writing. Before you sign any paperwork, make sure you understand all of the terms of the account, including the fees and the investment options.