Traditional IRAs vs. Roth IRAs
What is the difference: Traditional IRA or ROTH IRA?
Although they are both retirement accounts, traditional and ROTH IRAs differ in a few ways. The two most significant differences are:
- When you pay taxes on funds; and
- When you must withdraw funds.
- Tax deductibility – you do not get a tax deduction from a ROTH IRA
A traditional IRA lets you make pre-tax contributions. You only pay tax on your contributions when you make withdrawals (known as distributions). However, you can’t defer paying tax on your contributions indefinitely. Once you reach 72, you must start withdrawing money (RMB – required minimum distribution) and paying tax on the withdrawal.
ROTH IRA contributions are made from taxable income. Distributions from a ROTH IRA are tax free. Also, there is no required minimum distribution (RMD) from a ROTH IRA. However, you are required to leave the money in the ROTH for 5 years in order to receive the tax-free benefit on the distribution.