What are the differences between a “traditional” IRA and a Roth IRA?

Question

I hear that a traditional IRA offers a tax deduction whereas a Roth IRA doesn't, but there's got to be more to it than that: What makes a Roth IRA any good, if it doesn't provide a tax deduction? Wouldn't I be better off just investing my money within a plain investment account?

Answer 1

Both types of plans offer a tax benefit.

A traditional IRA allows you to invest pre-tax money into the account and it grows tax free. Once you withdraw the money it then gets taxed as though it were income based on the amount you withdraw for that calendar year. A Roth IRA has you invest post-tax money and also grows tax free. However, when you make withdraws in retirement that money is then tax free.

Neither plan is right for everybody. If you have a very high income now and plan on being in a smaller tax bracket later when you'll be making withdraws then the traditional IRA is better. If you will be in a higher bracket later, then the Roth IRA will server you more. Depending on the way you manage your retirement investing you can likely invest in both if you are unsure as to which would be better. The same type of investments should be able to be nested within each type.