IRAs Made Simple!

Understanding The Difference between The Traditional IRA and The Roth IRA

Many across the web are publishing posts today about Roth IRAs.  These posts will be written by people with brilliant financial minds.  They will likely give you more information than you could ever need about IRAs.  And you will be a much better educated person as a result of readng them.  By all means, read these posts - they will surely be very good and well worth your time!

But how many bloggers out there will write a simple, easy to understand post about these two IRA options?  That is what I am going to try to do...  explain the difference between the Traditional IRA and the Roth IRA in as simple of a format as possible and by using as few words as possible.  After all, your time is valuable.  So let's begin....

What is an IRA?
An IRA is an acronym for Individual Retirement Account.  Basically, it is a retirement savings account that you initiate on your own much like a SIPP pension in the UK (unlike a 401K that is employer initiated).  While you have to pay taxes on the pay you actually put in to the IRA (either when you put it in or when you take it out... more on that later), your money is allowed to grow tax free!  Because of that, having an IRA is an excellent strategy to help ensure financial security when you retire.  There are two main types of IRAs - Traditional and Roth. 

Traditional IRA
The Traditional IRA works like this: you put money into your IRA tax free. That means, you do not have to pay income tax on any money you deposit into an IRA... yet.   It is allowed to grow tax free.  When you reach retirement age and begin to withdraw your money, you must pay taxes on what you initially put in (but not the growth). 

Roth IRA
The Roth IRA works like this: you put money into your IRA and pay taxes on it just like all your other income. It is allowed to grow tax free.  When you reach retirement age and begin to withdraw your money, you get all your money completely tax free!

Huh?  So what's the difference?
Good question.  The difference (for this simplified version) is when you pay taxes on the money used to fund your investment.  Either you pay upfront or you pay when you collect.  The benefit to delaying paying the taxes (Traditional IRA) is, of course, instant gratification in lowering your tax bill when you invest in an IRA.  The benefit of paying your taxes upfront (Roth IRA) is that no matter how much money you are earning in retirement and no matter how much the tax laws change (after all, taxes seem to always be on the rise... do you really think that will be changing anytime soon?), you have already paid your dues.  You are not going to get hit with a huge tax bill because of the IRA at a time in your life where your income may be less than you have been used to.  And if you have planned well for retirement, you won't have to pay a big tax bill on the IRA if your earnings push you into a higher tax bracket!

All things considered, I think the Roth IRA is the best option to consider for most investors.  How about you?  DO you have any IRs?  if so, what kind and why?


WorkSaveLive said...

We have Roth IRAs and I'm certainly a big fan of them for no other reason then the one you explained: all of the money in there 30 years from now is ALL MINE! Regardless of how bad of shape our country gets in and regardless of how high the taxes go, I have already been taxed and they can't touch any of my earnings! Cha-ching!

Karunesh @ said...

I would choose the option of paying my taxes now. Thanks for sharing :)

John@MoneyPrinciple said...

Ah - now I understand. In the UK conventional pension funds are like your 401K's in that they are linked to the employer although we can't withdraw from them until 55.

In some cases the pension paid was a fraction of your final salary before retirement times the number of qualifying years. This particularly benefitted people who were promoted later in life, or promoted themselves if they became managers or something.

With people moving jobs etc it became quite difficult to do this because the fund had to be valued or you got lots of little pensions. In addition, aided by some silly legislation, some unscrupulous employers dipped into the pension fund when it became a bit fat - or not fat at all. As a result employers have to value their pension funds every year and, although the liability is spread over many years to come, this gets in some way subsumed into the total company valuation by the market (it's wrong to do that of course).

Now employers are moving to an individual fund which is built up and more portable. This particularly discriminates against women and does not generate employee loyalty either. The excuse is that pension funds are depleted because of the stock market but the reason is that we live longer than when the pension system was introduced.

Then there are pension plans which sound like your IRAs - you pay into them before tax and are taxed later on. Which is fine (a) assuming you live to draw a pension and (b) assuming your pension is less than your salary so you get tax relief at a possibly higher rate and pay tax at a lower rate.

Otherwise I don't think we have an equivalent to a Roth IRA - this just seems to be a high-yield savings plan.

Every country has different systems for what are essentially the same problem - even across the European Union there are many countries where the (often enormous) public sector is completely unfunded which makes it difficult when we hit the rocks!

Thanks for the explanation!

Admin JH said...

I have both. I generally think Roth IRA's make the most sense since I expect to be in a higher tax bracket later in life, and tax rates usually go up. Therefore I will probably pay more tax on the money later. I have a regular IRA because of an old 401k that I rolled over. I plan on changing it to a Roth and paying the taxes on it, but need to do so slowly so I can afford all the taxes!

SB @ FPR said...

Great to see you joining Roth IRA movement

Kari@ Small Budget Big Dreams said...

I don't have a Roth yet, but plan to start one as soon as we get all our of "one time" house buying expenses out of the way and get settled into our mortgage payments.

Shortroadto said...

The only concern I have is 3 decades from now, when the social security fund is dry, the government changes the law and taxes the Roths. It is a long shot but it can happen. Here is a post I did for the Roth IRA movement.

Kurt @ Money Counselor said...

Roth vs. Traditional is partly a philosophical question. I kinda like getting my tax benefit now--the traditional IRA--on the 'bird in the hand' theory. But I surely understand the mathematics probably supports the Roth for most people. If only I trusted the government more... :-)

CultOfMoney said...

In general, I'm a fan of fully funding your traditional IRA first, because given the same amount of starting dollars, the traditional gets you a larger amount in time because the amount paid in taxes with a roth is getting the benefits of compounding in a traditional IRA. said...

Correction, you said regarding the traditional IRA "When you reach retirement age and begin to withdraw your money, you must pay taxes on what you initially put in (but not the growth)" that’s not actually accurate. For a traditional IRA you are taxed on withdrawals for what you put in (contributions) and the earnings (growth) , but if you made non-deductible contributions you will be taxed on the earnings but not on the contributions.
Sorry I don’t usually go around making corrections to blogs, but this could make people make a very bad decision if they are trying to choose which IRA is best for them.

Anonymous said...

Thanks for any help, man.

Also visit my web site ... puerto rico all inclusive resorts

Anonymous said...

illuminating and entertaining. I’ve added your internet log to my “reading material.
” Preserve me updated!

My weblog versicherung online vergleich

Jordans Nike said...

cheap jordans, jordan shoes for cheap, Cheap jordans, cheap jordans, ugg, cheap nike free run, Discount Louis Vuitton, ugg boots, ugg soldes, ugg pas cher, uggs outlet, ugg australia, cheap nike air max, cheap nike free, wholesale jordan shoes, wholesale jordan shoes, nike free, Cheap Louis Vuitton Handbags, uggs on sale, cheap nike jordan shoes, air jordan shoes, discount nike jordans, cheap jordan shoes, Cheap Nike jordan shoes, Cheap LV Handbags, wholesale jordan shoes for sale, cheap jordan, Bags Louis Vuitton, Discount LV Handbags, cheap nike shoes

Junda Xu said...

20150709 junda
michael kors bags
true religion jeans
prada shoes
michael kors watches
ed hardy uk
tory burch shoes
coach factory outlet
chanel online shop
oakley store
oakley outlet
fitflops shoes
kate spade handbags
longchamp pliage
ralph lauren sale
kate spade
beats headphones
oakley sunglasses sale
kate spade outlet
nike blazer pas cher
chaussure louboutin pas cher
cheap ray bans
replica watches rolex
true religion sale
michael kors outlet
ray ban wayfarer
mcm backpack
coach outlet store online
abercrombie and fitch
burberry outlet
gucci uk
michael kors outlet
michael kors handbags
mont blanc pens
cheap oakleys
michael kors outlet online
soccer shoes
ralph lauren homme
nike air force 1
gucci handbags

Jianxiang Huang said...

vans for sale
peyton manning jersey,eric decker jersey,aqib talib jersey,emmanuel sanders jersey,shannon sharpe jersey,louis vasquez jersey
uggs on sale
tommy hilfiger outlet online
evening dresses outlet
jeremy maclin jersey,jamaal charles jersey,joe montana jersey,justin houston jersey,dontari poe jersey,eric berry jersey
dansko outlet
canada goose sale
atlanta falcons jersey
oakley sunglasses
true religion outlet
air jordan shoes
golden state warriors jerseys
packers jerseys
soccer jerseys,cheap soccer jerseys,cheap soccer jerseys for sale,soccer jersey,usa soccer jersey,football jerseys
real madrid football shirts
nike air max uk
arizona cardinals jerseys
futbol baratas
boston celtics jersey
nike trainers
real madrid jersey
robert griffin jersey,joe theismann jersey,andre roberts jersey,sonny jurgensen jersey,art monk jersey,bashaud breeland jersey,barry cofield jersey,perry riley jersey,e.j. biggers jersey,duke ihenacho jersey,josh morgan jersey
cheap evening dresses
air max 90
jordan 13
swarovski outlet
mbt shoes outlet
celtics jersey
moncler outlet
evening dresses
football shirts
manchester united football shirts

Wq Wang said...

coach factory online toms shoes outlet louboutin shoes mizuno wave abercrombie and fitch rayban salvatore ferragamo coach outlet store moncler nike air max eyeglasses frames cheap true religion jeans chanel outlet tory burch shoes oakley vault michael kors outlet longchamp handbags north face outlet celine bag cheap jordan ray ban outlet lululemon australia bottega veneta michael kors handbags clearance wedding dress dre headphones swarovski michael kors outlet online sale bags outlet barbour sale calvin klein outlet ralph lauren hair straighteners burberry christian louboutin

chenlina said...

michael kors outlet
louis vuitton handbags
true religion jeans
oakley outlet
louis vuitton handbags
chanel outlet
oakley vault
michael kors outlet
coach outlet
michael kors handbags
oakley outlet
adidas originals
louis vuitton handbags
coach factory outlet
tods shoes
canada goose outlet
ray ban sunglasses outlet
beats solo
cheap jordans
oakley sunglasses
coach outlet store online
hollister clothing
cheap uggs
cheap jerseys
louis vuitton handbags
cheap ugg boots
true religion outlet
air jordans
tory burch sale
gucci handbags
abercrombie and fitch new york
ray bans
louis vuitton outlet
the north face outlet
michael kors outlet online
louis vuitton handbags
michael kors outlet
celine outlet
tod's shoes
kobe 10

Zhenhong Bao said...

burberry outlet store
tory burch outlet
michael kors outlet
oakley sunglasses
cartier watches
michael kors outlet
ray ban sunglasses
rolex watches
mcm outlet
toms outlet
tory burch outlet online
omega outlet
cheap michael kors handbags
beats headphones
soccer jerseys
ray ban sunglasses
swarovski jewelry
cartier watches for sale
ray ban sunglasses
hermes belt
rolex watches
ralph lauren shirts
cartier watches
adidas shoes
prada handbags
oakley sunglasses
basketball shoes,basketball sneakers,lebron james shoes,sports shoes,kobe bryant shoes,kobe sneakers,nike basketball shoes,running shoes,mens sport shoes,nike shoes
ralph lauren polo
tory burch outlet
lululemon outlet
michael kors uk
coach outlet online
swarovski outlet
swarovski crystal
mulberry outlet

adham said...

شركة نقل اثاث بالدمام التفاؤل شركة نقل اثاث بالخبر كما انها افضل شركة نقل اثاث بالجبيل نقل عفش واثاث بالجبيل والخبر والقطيف والدمام
شركة نقل اثاث بالدمام
شركة نقل اثاث بالجبيل
شركة نقل اثاث بالقطيف

adham said...

شركة نقل عفش بالمدينة المنورة
شركة نقل عفش بجدة
شركة نقل عفش بمكة
شركة نقل عفش بالطائف
نقل العفش والتخزين
شركة نقل عفش بالمدينة المنورة
شركة نقل عفش بالمدينة المنورة
شركة نقل عفش بالرياض
شركة نقل عفش بينبع
شركة نقل عفش بالدمام
شركة نقل عفش

adham said...

شركة نظافة بالدمام
شركات النظافه بالدمام
شركة تنظيف منازل بالدمام
شركة نظافة شقق بالدمام
شركة تنظيف خزانات بالدمام
شركة تنظيف بالدمام
شركة رش حشرات بالدمام
شركة تنظيف منازل بالدمام
شركة نظافة بالجبيل

adham said...

اهم شركات كشف تسربات المياه بالدمام كذلك معرض اهم شركة مكافحة حشرات بالدمام والخبر والجبيل والخبر والاحساء والقطيف كذكل شركة تنظيف خزانات بجدة وتنظيف بجدة ومكافحة الحشرات بالخبر وكشف تسربات المياه بالجبيل والقطيف والخبر والدمام
شركة تنظيف خزانات بجدة
شركة مكافحة حشرات بالدمام
شركة كشف تسربات المياه بالدمام

adham said...

اهم شركات نقل العفش والاثاث بالدمام والخبر والجبيل اولقطيف والاحساء والرياض وجدة ومكة المدينة المنورة والخرج والطائف وخميس مشيط وبجدة افضل شركة نقل عفش بجدة نعرضها مجموعة الفا لنقل العفش بمكة والخرج والقصيم والطائف وتبوك وخميس مشيط ونجران وجيزان وبريدة والمدينة المنورة وينبع افضل شركات نقل الاثاث بالجبيل والطائف وخميس مشيط وبريدة وعنيزو وابها ونجران المدينة وينبع تبوك والقصيم الخرج حفر الباطن والظهران
شركة نقل عفش بالرياض
شركة نقل عفش بالطائف
شركة نقل عفش بالدمام
شركة نقل عفش بجدة
شركة نقل عفش بمكة
شركة نقل عفش بالمدينة المنورة
شركة نقل عفش بينبع
شركة نقل عفش بالخرج
شركة نقل عفش بالقصيم
شركة نقل عفش بخميس مشيط
شركة نقل عفش بتبوك
شركة نقل عفش بابها
شركة نقل عفش ببريدة
شركة نقل عفش بنجران
شركة نقل عفش بحائل
شركة نقل عفش بالظهران
شركة نقل عفش واثاث
شركة نقل عفش

dada24 Xu said...

adidas nmd runner
michael kors outlet store
coach factory outlet online
adidas nmd runner
true religion outlet online
lacoste outlet
cheap oakley sunglasses
cheap rolex watches
true religion jeans outlet
moncler pas cher

Post a Comment

All information provided on this site is for informational purposes only. will not be liable for any errors or omissions in this information or any damages arising from its display or use. No content may be reproduced without permission from

Design by Free WordPress Themes | Bloggerized by Lasantha - Premium Blogger Themes | Best Hostgator Coupon Code
Related Posts Plugin for WordPress, Blogger...