The one difference that matters
Both accounts let your investments grow without yearly tax. The difference is when you pay tax on the money. Traditional is “tax me later.” Roth is “tax me now.”
Side by side
- Contributions: traditional may be deductible; Roth is made with after-tax money.
- Growth: tax-deferred in a traditional IRA; tax-free in a Roth when rules are met.
- Withdrawals in retirement: taxed as ordinary income from a traditional IRA; tax-free from a Roth if qualified.
- Required withdrawals: traditional has them in your 70s; the original Roth owner has none.
- Access to contributions: you can generally take out what you put into a Roth without tax or penalty, though growth is treated differently.
- Income limits: Roth eligibility phases out at higher incomes.
A made-up example
Suppose you invest 6,000 dollars and it grows to 18,000 dollars over many years, and your tax rate is 22% at both ends. In a traditional IRA you deduct the 6,000 up front, then pay 22% on 18,000 on the way out, leaving 14,040 after tax. In a Roth you pay 22% on the 6,000 up front (so you really invest about 4,680), which grows to 14,040, and you owe nothing on withdrawal.
When the tax rate is the same, the result is identical. The choice becomes interesting only when your rate changes.
Questions that help you decide
- Is your income unusually low now (early career, a gap year)? A Roth may look better, since you pay tax at a low rate.
- Is your income at a peak? A traditional deduction may be worth more now.
- Do you want flexibility? A Roth’s access to contributions and lack of required withdrawals can help.
- Are tax rates likely to be higher in future? Nobody knows, which is why people often use both.
Do not forget the investments
The account type is only half of the decision. What you invest in, at what cost, over how many years usually matters more. See compound growth and expense ratios.
Quick answers
Can I convert a traditional IRA to a Roth?
Yes, but the converted amount is generally taxable in the year of conversion. Talk to a tax professional before doing a large one.