No matter what their age, people are always consciously or subconsciously planning for their retirement. The current situation has made it clear that the average person would need a considerable amount of money to retire comfortably.  

Most people consider starting an individual retirement account (IRA). It’s a long-term savings account that allows you to enjoy tax benefits. The IRA is a viable option for self-employed people; thus, they do not have access to employer-provided retirement accounts like the 401(K).  

You may also consider the IRA to save up on the side even if you’re enrolled in one of the employer-sponsored accounts. Once you decide to open IRA, you have two options: the Roth IRA and the Traditional IRA.  

What Is the Roth IRA? 

A Roth individual retirement account is where you pay taxes on money going into this account, but all the withdrawals after that are tax-free, which will secure your retirement from heavy taxes when you’re no longer earning. It allows you to contribute after-tax dollars to your savings for future withdrawals. 

Benefits of Roth IRA

• If you have an income, you qualify to make after-tax contributions to this account at any age 

• You are free to make tax-free withdrawals after the age of 59 and a half and when you’ve held the account for at least 5 years  

• Even if you don’t use all the withdrawals and pass them on to your heirs, they also qualify for tax-free withdrawals  

What Is the Traditional IRA? The traditional Individual retirement account allows you to save pre-tax money for retirement, allowing your investment to grow tax-deferred, even indefinitely. You’ll have to pay the ordinary income tax on every withdrawal, allowing you to receive tax benefits.  

Benefits of Traditional IRA  

• A traditional IRA allows your retirement savings to grow tax-deferred 

• Fewer limitations and restrictions on opening an account 

• You have the flexibility to take penalty-free withdrawals for some expenses like home buying, childbirth, etc. 

Roth IRA vs. Traditional IRA 

Contributions  

Roth IRA contributions are tax-deductible, while traditional IRA contributions may or may not be tax-deductible based on your income status, filing, and employer-sponsored retirement plan. As a result, your contributions will grow tax-free and tax-deferred in a Roth IRA and traditional IRA, respectively. Contributions to Roth IRAs are after-tax dollars, while contributions to traditional IRAs may be pre-tax or after-tax dollars.  

Tax Benefits 

The biggest difference between the two is that while Roth IRAs allow you to enjoy tax-free withdrawals later in life, traditional IRAs allow you to benefit from tax benefits today and pay the ordinary tax on withdrawals on a significantly increased income.  

Income Limitations  

Traditional IRAs have no income restrictions, while Roth IRAs require a yearly income of less than $135,000.  

Best For  

Roth IRAs are more suited to people who think they will be in a higher tax bracket, while traditional IRAs are better for people who expect to be in a lower to middle-income bracket in the future.