Which type of IRA is right for me?

Last week we asked “what’s one thing you wish you understood better about money?” We’ve gotten some great questions we’re going to share along with the answers over the next few weeks. First up…

“What’s the difference between a regular IRA and a Roth IRA and which one should I use?”

An IRA (or Individual Retirement Account) is a tax advantaged account for saving and investing for your retirement. They’re not connected to your employer like a 401(k) and there are two types most people need to know about: the traditional (or regular)and Roth. We’re going to answer the first question this week; “what’s the difference?” and then cover which one you should use next week since it’s not as simple as it seems at first.

The primary difference between the two is when you pay taxes. In both cases you contribute money to your IRA, invest it and watch it grow (hopefully a lot), and then withdraw the money later to live on in retirement.

With a traditional IRA you can deduct the contribution, up to a limit, from your current year income (meaning you don’t pay taxes on that amount), the investment grows without being taxed, and then you pay income taxes on money as you withdraw it in retirement.

With a Roth IRA the contribution is not deductible, you pay taxes on the income just like any other income, and then contribute it to a Roth IRA. The investment grows without being taxed, and then you can withdraw the money tax free in retirement.

There are plenty of other difference (many of which we’ll cover next week) but this is the big one. With a traditional IRA you get the tax break now and pay taxes in retirement. With a Roth IRA you pay the taxes now and get the break in retirement. That’s it!

If you still have questions stay tuned for next week’s explanation of which one to choose or sign in and chat with a BrightDime coach!