Which one is better?
These two retirement accounts are some of the most basic and useful retirement tools available. Now the question is, what is the difference between the two?
Traditional IRA: With this account type, your contributions can be tax-deductible. This means that if you make 100K before tax one year, you can contribute up to $6,000(contribution limit, $7,000 if you are 50 or older) to a traditional IRA and you will then only be taxed on 94K. You would then be able to invest your IRA funds into the stock market or other securities and your earnings will not be taxed until the money is taken out of your IRA. This allows you to potentially accumulate much more earnings over the course of your life leading up to retirement. You are required however, to start taking some distributions once you turn 70 and 1/2 so that the government can get its fair cut.
Roth IRA: This account, on the other hand, is funded with after-tax money. This means that if you made 100K in a year, you would be taxed on the full 100K and then you could fund your Roth with what is left. Similar to a traditional IRA, the earnings that accumulate inside a Roth are not taxed. The power of this account type occurs when you take distributions out of it. Your entire account balance(contributions and earnings) are tax free if taken out after you are 59 and 1/2 and there are no minimum distribution requirements at 70 and 1/2.
There are other differences as well which are summarized in the following chart:
Retrieved from fidelity.com
So the question is, which is better? Well, just like almost everything, else, it depends. It depends on numerous things including your taxable income, age, marital status and much more. It depends on what your goals and dreams are and what really makes sense for you. Oftentimes, it makes sense to reach out to a professional to see what is the best and most efficient way to reach your life and retirement goals.