Saving for retirement is a major obstacle for many Americans. A 401k plan is the most common vehicle to place money aside for employees who are fortunate enough to do so, but what about the millions of people that do not have access to a plan through their employer? An individual retirement account may be the best option for workers without a 401k plan. There are two main types of IRAs: Traditional and Roth. Both are designed to help you save for retirement. However, there are some key differences between the two.
A Traditional IRA experiences tax-deferred growth, which means you contribute pre-tax dollars and pay ordinary income taxes when you make withdrawals in retirement. Depending on your income and if your spouse is already covered by a retirement plan at work, your contributions may also be tax-deductible.
A Roth IRA grows tax-free, meaning you contribute dollars after Uncle Sam takes his cut, and you won’t pay taxes on withdrawals as long as you take them after you have reached age 59 1/2 and owned the account for at least five years. A Roth IRA is generally recommended for younger savers or people who believe their tax responsibilities will be greater at retirement.