Are not all retirement accounts the same, they just hold money for you while you are waiting to retire correct? This is not true and most retirement accounts differ in many ways and these differences can make or break the account for you. Below is listed a few differences between a Traditional IRA and a Roth IRA.
A Roth IRA is a retirement account that requires for the holder to pay taxes on the money that is contributed to the fund in the year it was earned. This is not true of a Traditional IRA which allows for the holder to wait until the funds are withdrawn in order to pay taxes on the money. Also there are Roth contribution limits and income limits which narrow the pool of people who can contribute to the fund.
When you contribute money to a Traditional IRA your adjusted gross income (AGI) is reduced. This means that when you file your taxes the amount of money you have made in the year is reduced by what you have contributed to the fund, and this is not the case when contributing to a Roth IRA. The lowering of your AGI has the potential to place you in a lower tax bracket and thus you can receive tax breaks and benefits.
It can also be argued for both a Traditional IRA and a Roth IRA that depending on which state you retire to one account can be better than the other. If you currently live in a higher income tax state than the one you wish to retire to then it is possible that by using a Traditional IRA you can save money because your income will be taxed later. The opposite is true of a Roth IRA because if you live in a lower income tax state and plan to move to a higher taxed state then you can save money.
There are benefits and disadvantages to both retirement accounts and depending on your financial situation one could be better suited for you.
- Traditional IRA or A Roth IRA You Decide (2011tax.org)
- IRA: Traditional IRA and Roth IRA (2010tax.org)