eli5 How does a roth IRA work, and how is it different from a traditional IRA?
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There’s other differences and nuances, but the big thing is that you deposit post-tax money in a Roth IRA and the interest on the withdrawals aren’t taxed while with a traditional IRA you deposit pre-tax money and the withdrawals are taxed.
So it’s a matter of whether you pay taxes now or after you retire.
Generally speaking, if you think you’ll be in a higher tax bracket when you retire you want to do a Roth IRA so you pay the taxes on it now when you’re at a lower tax bracket but if you think you’ll be in the same or lower tax bracket when you retire you should do a Traditional IRA so you pay the taxes then when you’re at a lower tax bracket.
Traditional IRA: The money you deposit now is deductible from your taxes this year. Basically you don’t pay income tax on the money you put into it right now. When you withdrawal the money in your retirement you owe taxes on all the growth it made over the years
A Roth IRA: You pay income tax on the money you deposit now, you do not pay income tax on the growth when you withdrawal it in retirement.
There’s a bunch of rules, and limits and such on the taxes and withdrawals. But that’s the gist of it.
Roth: best when you’re young and have a lower income and/or tax rate because you pay taxes on it before it goes into investments. Also good if you want to be able to take out what you put in at some point before you retire.*
Traditional: good if you want to pay taxes later and defer that shit until you’re old.
*caveats abound, consult a tax professional
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