Can you please tell me the biggest difference between a ROTH IRA and a Traditional IRA?
Most prospective clients I encounter get confused with the differences between a ROTH IRA and a Traditional IRA, and that’s OK. So instead of endlessly writing about all the differences, let’s just focus on one. It’s the most important difference, and will likely drive the decision on which one you use:
ROTH IRA = Pay taxes now
Traditional IRA = Pay taxes later
That’s the major difference, and for most people that’s enough. Sweet and simple.
When you use a ROTH IRA you pay taxes now, at your current tax rates, and never again (so long as you follow the proper IRS rules). That’s right. Follow the rules and your interest, earnings and capital gains will never be taxed again… ever!
When you use a Traditional IRA the opposite is true. You get to skip paying taxes now through an income tax deduction (there are earnings limits that apply), and you’ll pay the taxes in retirement. That means you can postpone paying taxes on the earnings, interest and capital gains until you retire (so long as you follow the proper IRS rules).
If you remember nothing else, try to remember that ROTH IRAs are taxed now and Traditional IRAs are taxed in retirement. If you still want to know more though, feel free to check out this IRS chart which details some of the other differences between the two.
Tim Plachta, CFP® owns and operates Reliant Wealth Management and Reliant Consulting Partners. He works primarily with small business owners to help them increase profit, reduce their workload (so they can relax more), and invest enough of their earnings to achieve financial independence.