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?
1 Answer
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 serve 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.
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1One other thing to keep in mind is that because you are limited to a $5000 contribution in either case, you can essentially invest more in a Roth IRA than in a Traditional IRA because you are investing post-tax money rather than pre-tax. Commented Aug 4, 2010 at 21:26
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5Also remember that you have access to all roth contributions tax free in case of severe emergency. Commented Mar 29, 2011 at 18:55
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@en1gmatic325: Two caveats on the $5k maximum. First, it's $6k if you're over 50. Second, if you're running an SEP IRA, then the contribution limit is much higher.– Peter K.Commented Dec 27, 2011 at 2:12
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In addition, there are income limits for contributing to Roth and income limits for being able to tax deduct contributions to the Traditional. Commented May 21, 2014 at 21:20
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Regarding the Roth allowing to withdraw the money tax-free (once one's over 59.5-year-old): it might not be the case if you plan to live/retire outside the United States: Tax on money withdrawn from Roth 401(k) and Roth IRA when living outside the United States and over 59.5-year-old Commented Oct 16, 2017 at 3:10