Image by Property#1 via Flickr
IRA’s are a popular long-term savings tool, and the reason for their popularity is the interest one can earn. Many people are surprised at how much an IRA adds to their investment, even within the first year. Qualified investments also can provide tax benefits. The main differences between a Roth IRA and a Traditional IRA are the following:
In a Roth IRA, you invest money after you already paid taxes on it thereby releasing you from future tax obligations; however, in a traditional IRA, you invest before you are taxed thereby creating a future tax liability when you go to withdraw those funds. A traditional IRA allows you to earn interest on money that might of otherwise been taxed; however, it is a gamble on whether that interest will earn more than what you may be taxed at a future rate.
The Roth IRA requires that you earn your income to invest it, meaning it has to be income from wages, tips, self-employment, etc. You have to work for it. Anyone can contribute to a Traditional IRA, regardless of income source.
A Roth IRA allows more freedom for withdraw such as little to no tax penalties for early withdraw of funds. The Roth IRA does not require withdraws at a certain age. A traditional IRA will penalize you in taxes for withdraw before a certain age (59 and a half), and you will be required at a later age to withdraw, whether you need the money or not.
The Roth IRA is most ideal for most people; however, speak with a financial advisor about what is best for you.