As a very financially illiterate person, I’m just now entering the adult world and trying to start being smart with my money. Any tips/advice on how to navigate opening an IRA would be lovely!
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Traditional IRA: you put money into it today and that money is taken off of your taxable income in the year which you make the contribution. The entire amount is taxed as income when you withdraw from it in retirement.
Roth IRA: you put money into it today but it does NOT reduce your taxable income up front (i.e., you pay the taxes on you contribution up front). When you withdraw the funds in retirement, you don’t pay any taxes on that money.
Traditional IRAs are good if you suspect your effective tax rate will be LOWER in the future than it is TODAY. Roth IRAs are good if you suspect your effective tax rate will be HIGHER in the future and/or you expect your investment gains would offset any tax advantages from the traditional IRA.
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