eli5 How does a roth IRA work, and how is it different from a traditional IRA?

Question

eli5 How does a roth IRA work, and how is it different from a traditional IRA?

In: 6

Answer 1

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.