Q: Today’s question comes from Jen. She writes: I’d like to set up an IRA for myself. How do a regular IRA and a Roth IRA differ when it comes to taxes? Is one better than the other?
A: Excellent move, Jen! As you noted, the biggest difference between the traditional and Roth IRA is the tax break. A traditional IRA gives you a tax deduction now, while Roth IRAs don’t – but Roth withdrawals are tax-free later, and traditional IRA withdrawals are not.
You could make a decision about which IRA is best for you based on that single piece of information. For example, if you know you’ll be in a higher tax bracket in retirement than you are now, the Roth’s tax-free withdrawals are more valuable to you. If you’re in a high tax bracket right now or predict your tax rate will be lower in retirement, a traditional IRA is a good choice.
No crystal ball for your future taxes? No worries – here are other key differences that could help you decide. Once you pick your IRA type, it’s time to choose where to open it. Start exploring your options here.
