What is the difference between a traditional IRA and a Roth IRA?

A traditional Individual Retirement Account, or IRA, and a Roth IRA are both types of retirement savings accounts that offer tax advantages, but they differ fundamentally in terms of how and when taxes are paid on contributions and withdrawals. With a traditional IRA, contributions are typically made with pre-tax dollars, which means that individuals can deduct the contributions from their taxable income during the year they are made. This can potentially lower the individual’s overall tax liability for that year. However, taxes will be owed upon withdrawal during retirement, when individuals begin to take distributions at age fifty-nine and a half or older. Withdrawals are taxed as ordinary income, which can be a significant consideration when planning for retirement. In contrast, a Roth IRA is funded with after-tax dollars, meaning that individuals do not receive a tax deduction for their contributions. The primary benefit of a Roth IRA is that all qualifying withdrawals in retirement, including both contributions and earnings, are tax-free, provided certain conditions are met. Additionally, unlike traditional IRAs, there are no required minimum distributions during the account owner’s lifetime, allowing for more flexibility in retirement planning. This distinction in tax treatment can influence an individual’s decision on which type of IRA to choose, depending on their current tax situation and expectations about their future tax rate. It is always beneficial for individuals to evaluate their specific circumstances and financial goals when considering these retirement accounts. For the most accurate and tailored advice, individuals may look for relevant information on the official web page of Franklin Templeton Retirement Plans.