Can someone please explain like I’m five the difference between an IRA and a Roth IRA and why it would be needed?
In: Economics
When you fully retire, you need an income source to live off of. Most Americans get **Social Security**, but it’s usually not enough to live comfortably. You could save your money in a savings account, but the interest is low. You could invest in stocks in a normal brokerage account, but you still have to pay taxes on it.
Since the government doesn’t want a bunch of bankrupt/homeless senior citizens (and upping the Social Security tax would have huge backlash), they allow **tax-advantaged brokerage accounts** for retirement purposes.
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Savings & taxable brokerage: taxed twice
Tax-advantaged brokerage: taxed once
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These come in many forms, the 2 most popular being a **401(k)** and an Individual **Retirement Account (IRA)**.
A 401(k) is something your job would have to offer, which not all do. An IRA is something you can setup on your own (there are income limits and whatnot, but your average American will qualify).
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**Traditional** retirement accounts are ones where you only pay income taxes when you take the money out, thus you don’t pay the taxes now when you deposit money.
**Roth** retirement accounts are ones where you only pay income taxes now when you deposit, thus you don’t pay the taxes when you take the money out.
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For an IRA, if you have a 401(k) or similar at your job then you likely can’t do Traditional (well you can, but no tax benefit), this is why Roth IRA is so popular because more people qualify for it.
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