The individual retirement account (IRA) is celebrating its golden anniversary. Created in 1974, this savings vehicle has helped millions of people build resources for retirement. And in 1997, the Roth IRA was introduced. But which IRA is right for you?
Let’s look at the basic differences between the two IRAs. With a traditional IRA, you generally invest pretax dollars, so the more you put in, the lower your taxable income. Your earnings grow tax deferred, meaning you pay no taxes on them until you start taking withdrawals. (If you take withdrawals before you reach 59½, you’ll be subject to ordinary income tax and a 10% IRA penalty.)
When you invest in a Roth IRA, your contributions aren’t deductible, but they can be withdrawn at any time, tax- and penalty- free. And you can typically withdraw your earnings on these contributions tax free once you’re 59½ and you’ve had your account at least five years. (If you don’t meet these conditions, withdrawals of earnings are subject to income taxes and the 10% penalty.)
