What’s the difference between a Roth and traditional IRA?
An IRA (or Individual Retirement Account) is a tax advantaged account for saving and investing for your retirement. IRAs are not connected to your employer like a 401(k) is and there are two types most people need to know about: the traditional (or regular)and Roth.
The primary difference between the two is when you pay the taxes.
With both types 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.
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.
There are other differences between the two that you need pay attention to when deciding which to contribute to, but that’s the big one.