The Difference Between a ROTH and Traditional IRA

by | Sep 3, 2019 | Finances | 0 comments

Trying to understand the difference between a ROTH vs Traditional IRA? And which one works best for you when your job does not offer a retirement plan?

On this segment of Dollars and Sense, on Daily Blast Live, Jeff Schroeder and I break down some simple ways to understand which retirement option is best for you and your money. 

Viewer question: My Job Does Not Offer a Retirement Plan. Should I Contribute to a ROTH IRA or a Traditional IRA?

An easy way to understand the difference between a ROTH and a Traditional IRA is to follow the ‘Now or Later Rule’ when it comes to how you want to handle taxes.

For a ROTH IRA, you will pay taxes NOW, which means you will be contributing POST, or AFTER, tax dollars. The benefits of contributing this way include:

  1. Tax advantaged growth
  2. Tax free withdrawals once reach retirement age
  3. Penalty free early withdrawals

For a Traditional IRA, you will pay taxes LATER, which means you will be contributing with PRE tax dollars. The benefits, and cons, of contributing in this manor include:

  1. Lowered taxable income or tax deductions
  2. More early withdrawal penalties
  3. Possibly taxed at a higher tax rate when it comes to withdrawals once in retirement

Which is best… it all depends on many factors including income, tax rate, ability to save and financial goals. But for a quick and dirty answer, choose a ROTH IRA when you are taxed at lower rate and want to contribute with post tax dollars. Go for a Traditional IRA if you are in a higher income tax bracket and want to take advantage of deductions.

Of course, reach out to your trusted Certified Financial Planner (CFP) for help on the best ways to manage your retirement dollars.

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About Me

Phylecia Jones

Hi! I am a traveler, happy hour lover, #STEM advocate, and computer scientist that stumbled upon building a career as a television money nerd, TEDx speaker and Founder of iFind You Close, finding speaking gigs across the globe.

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