What is the Difference Between a Traditional IRA and Roth IRA?

07/25/23

A Traditional IRA consists of pre-tax funds, meaning you can write off contributions. For example, if you make $60k/year and contribute $5k to a Traditional IRA, you only have to pay taxes on $55k of your income. However, when you withdraw money from this account down the road, you pay taxes on the amount you withdraw. If your $5k contribution grows to $7k and you withdraw the full amount, you pay taxes on that $7k since you received the tax deduction up-front.

A Roth IRA operates the opposite of a Traditional IRA. It consists of post-tax funds, meaning you do not have the advantage of writing off your $5k contribution. You pay taxes on your full $60k salary, but you will NEVER pay taxes on that money again. If your $5k contribution grows to $7k and you withdraw the full amount, you owe nothing in taxes since you did not receive a tax deduction up-front.

As of 2023, the maximum combined contribution for a Traditional IRA and Roth IRA is $6,500 per year. If you're 50 years old or older, you can contribute up to $7,500 per year.

* Please contact me to discuss which one of these is most advantageous for you. Your age, goals, time horizon, and income can all affect which of these is the better avenue. I never charge for meetings or advice. I only get paid directly from your account(s) that I manage.