A Traditional IRA and a Roth IRA are both individual retirement accounts (IRAs) that offer tax benefits to help you save for retirement, but they have some key differences:
- Contributions: With a Traditional IRA, contributions may be tax-deductible in the year they are made, and the money grows tax-deferred. With a Roth IRA, contributions are made with after-tax dollars, but the money grows tax-free and qualified withdrawals in retirement are also tax-free.
- Eligibility: There are income limits for deducting contributions to a traditional IRA, and for contributions to a Roth IRA.
- Age limit: There is no age limit for contributing to a Roth IRA, but there is an age limit for contributing to a Traditional IRA. Contributions to a Traditional IRA must stop when the account holder reaches age 70 1/2.
- Required Minimum Distributions (RMD): With a Traditional IRA, you are required to take minimum distributions starting at age 72, which means that you’ll have to start withdrawing money from your account and paying taxes on it. With a Roth IRA, there are no RMDs during the account holder’s lifetime.
- Inheritance: With a Traditional IRA, the beneficiaries will pay income tax on the distributions they receive. With a Roth IRA, the beneficiaries will not pay income tax on the distributions they receive as long as the account has been open for at least five years.
In summary, a Traditional IRA allows you to deduct your contributions and the money grows tax-deferred but you’ll have to pay taxes on the money when you withdraw it in retirement. On the other hand, a Roth IRA contributions are made with after-tax dollars, but the money grows tax-free and qualified withdrawals in retirement are also tax-free. The best option for you will depend on your current tax situation, retirement goals and overall financial situation. It’s best to consult with a financial advisor or tax professional before making a decision.