Let’s look at the two different IRAs
Traditional IRA
A Traditional IRA is an Individual Retirement Account to which you contribute pre-tax dollars. Your investments grow tax-deferred. When you make withdrawals after age 59½, they’re treated as current income.
The after-tax money you deposit in your IRA can grow tax-deferred. Whatever earnings or capital appreciation you have on your contributions won’t be taxed until you withdraw that money many years later. Traditional IRAs have no annual income limits on contributions. Anyone can contribute to a traditional IRA.
Roth IRA
A Roth IRA is an individual retirement account that offers a valuable tax-free income in retirement.
Although there is no up-front tax deduction for Roth IRA contributions, Roth distributions are tax-free when you follow the rules. Every penny you stash in a Roth IRA along with dividends and capital appreciation is your money. You can tap your contributions and earnings after you have had the account open for at least five years (and you must be 59.5 years old) for tax-free and penalty-free withdraws.
Roth IRAs do have annual income limits. For the 2024 tax year, you can contribute to a Roth IRA if your modified adjusted gross income is less than $146,000. (MAGI) and $230,000 (MAGI) for couples. There are additional income options see current IRS Rules.
Tax Benefits
The benefit of either IRA is that they both provide generous tax breaks, but it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution. However, withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.
So with traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement. Since both types of retirement accounts can be beneficial, you can actually have one of each. You just have to pay careful attention to not go over the contribution limits and consider taxes now and the future.
What Next?
You can open a Roth IRA and a traditional IRA at many different types of financial institutions, such as banks, credit unions, and even brokerage firms. You can even have an precious metals IRA. The minimum for opening the account is determined by the financial institution and the maximum contribution is determined by the government.