Individual Retirement Accounts, commonly referred to as IRAs, are tax favored accounts to help you save for your retirement. The two main types that you can choose from are a Traditional IRA and a Roth IRA. The main differences between a Traditional and Roth IRA, is how and when you get a tax break, and when you pay tax on your money.
With a traditional IRA, your contribution can be tax deductible while the growth is tax deferred. With a Roth IRA, your withdrawals in retirement (after age 59 ½) are tax free, but you get no tax deduction up front when making a contribution.
In other words, with a traditional IRA, you pay taxes later - when you take withdrawals in retirement. A Roth IRA operates in reverse: You pay taxes upfront, because your contributions are made with after tax dollars, but withdrawals in retirement can be tax-free.
One factor that can help you decide which IRA can be best for you, is by looking at your current income tax bracket. If you are in a low tax bracket, such as the new 12% bracket for 2018, and you expect your tax bracket to go up later, a Roth IRA may be a good choice. This can happen for people early in their career, or who have changed careers, and sometimes for newly retired persons.
However, if you are currently in a high tax bracket, such as people close to retirement age usually are, a traditional IRA may make more sense. This is because a traditional IRA may allow you to get a tax deduction when it benefits you most.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.