Frontwave Blog

Traditional IRA vs. Roth IRA: What’s the Difference?

Perhaps you’ve graduated from school (congratulations!) and your new 9-5 job has you already daydreaming about retirement, so you want to plan early. Or you’re looking to grow your family and trying to map out what life looks like in retirement. Regardless of how you’ve stumbled upon the almighty question – What is an IRA and what does it mean to be Traditional or Roth? – we’re happy you’re here. Welcome to the Figuring-Out-The-Financial-World-One-Step-At-A-Time Club.

Let’s start with the basics. What is an IRA? IRA stands for Individual Retirement Account. Think of it as your own adult piggy bank. You drop money in there to save for your future retirement, like how a child saves spare nickels and pennies to one day purchase their favorite action figure. Just as cool with just as much easy-breezy effort.

An IRA is simple enough to understand, but the real confusion lies in the differentiation. Both are fantastic options and figuring out which one fits both your lifestyle, and your timeline, best is totally subjective.

Firstly, a Traditional IRA essentially means the money you’re depositing into your IRA has not yet been taxed, so it will be taxed when you do eventually choose to withdraw the money. When you withdraw, you will be taxed at your present-day income rate at the time of withdrawal rather than the income level you were in at the time of deposit. You’ll pay taxes at any point when you withdraw, but you’ll also be subject to a 10% early withdrawal penalty fee if you are not yet 59 ½ years old (with certain special exemptions such as medical expenses, homebuying expenses, etc).

On the other hand, with a Roth IRA, you contribute dollars that have already been taxed so you won’t have to worry about paying taxes on your contributions at the time of withdrawal at any time (not just when you turn 59 ½); you will, however, pay taxes and the 10% penalty fee on your earnings (sum you’ve acquired on top of your own contributions) if you are younger than 59 ½. Notably, there are income limits for those utilizing a Roth IRA, and these limits are updated annually. You’ll want to check the IRS website  for more information once you begin planning.

Ultimately, your IRA decision comes down to whether you think your future income will be very different from what you currently make (and what tax bracket you’re present, and future, self will be in). Or, if both appeal to you, you’re welcome to have both a Traditional AND a Roth IRA so long as combined, you don’t contribute more than the IRS’ imposed contribution limits.

The earlier you start planning, the sweeter retirement will taste. For all the information under the sun regarding contribution limits, deduction limits, income limits, comparison charts, and more, visit the IRS website. Don’t forget – at Frontwave, our Frontwave Investment Services team is ready and excited to take out the stress of your investment prep. Check the team out here and give ‘em a buzz.