How to Decide Between a Roth IRA and Traditional IRA

Don't invest in a Roth IRA and Traditional IRA during the same tax year, although it is possible, it is usually not the best plan. This is because each type of account serves a different purpose. You should figure out which type of account fits your needs best, and contribute to only one, the Roth IRA or Traditional IRA.

Difficulty: Moderately Easy

Instructions

1. 
    

   The main difference between a Roth IRA and Traditional IRA is the timing of when your contributions are taxed.
   
   Basically, with a Roth IRA, you contribute money that has already been taxed, it grows tax free in your account, and when you are ready to withdraw the money, it is not taxed when you take it out. This makes the Roth IRA especially useful for young people who expect to be at a higher tax rate when they begin withdrawing funds from their retirement account.

2. If you are in your peak earning years, already at a high tax rate, and expect your tax rate to be lower when you begin to withdraw your money, than the Traditional IRA might be the right choice for you. When you contribute to you Traditional IRA account, you contribute pre-tax dollars, your money grows tax free in the account, and it is finally taxed when you withdraw the money.

3. 
    

   These are the two main considerations to take into account when deciding between a Roth IRA and Traditional IRA. There are very few situations where it would be the best course of action to split your yearly contribution between the two types of accounts.

Tips & Warnings

• For most young people, just starting out with investing, the Roth IRA is a no-brainer. It is easy to set up, easy to invest in, and it can be a powerful tool to help you save for your longtime goals.
• You can set up Roth IRA and Traditional IRA accounts at most brokerages.

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on 2/19/2009 Thanks for this comparison of a Roth IRA and traditional IRA.