I have received a tax free gift of $4000 from a relative. I would like to put the entire amount into a retirement amount but I am not sure as to whether I should put it in an IRA or a Roth IRA. If I understand correctly: If I put it into an IRA, I get a tax deduction for the $4000 (say 25%, so $1000) this year, but I am taxed on that and any gains when I take it out about 20 years from now. (Assume that I am not reinvesting any tax refund as a result of the deduction) Since the deduction balances out the future tax (presumably), I am only paying tax on the gains, however over 20 years, those gains could be greater than the original $4000 itself. (Doubling would only take 3.6% annual return over 20 years )
If I put it into a Roth IRA, I don't get a tax deduction, but I get to withdraw the original $4000 and all the gains, tax free in about 20 years.
It seems the Roth IRA is a better deal tax wise, but I would like to hear if I am missing something.