Q: I want to start saving for my retirement. Which type of IRA should I choose -- traditional or Roth?
The biggest difference between traditional and Roth IRAs is their tax treatment. The No. 1 choice you have to make is: Do you want your tax break now or later?
With a traditional IRA, your contributions can be tax-deductible right away, depending on your income and if you have another retirement plan at work. If you're in the 25% tax bracket and contribute the $5,500 annual maximum to a traditional IRA, this translates to $1,375 in tax savings that you get to enjoy right away.
On the other hand, contributions to a Roth IRA are not deductible. However, your qualifying withdrawals will be 100% tax-free, no matter how big your account grows. By paying taxes on your Roth contributions now, you can avoid taxes in retirement.
Roth IRAs have a few other benefits as well. Because you've already paid tax on the money you contribute, you're free to withdraw your original contributions (but not your investment gains) at any time, without penalty. This makes a Roth IRA a smart choice for people who don't want their money to be tied up until retirement. Withdrawing from a traditional IRA early generally results in a 10% IRS penalty.
Additionally, Roth IRAs have no minimum distribution requirements and no maximum age limit for contributions, whereas a traditional IRA has both, which kick in at age 70-1/2.
The bottom line is that there is no universally correct answer to the question. In fact, I use a Roth IRA and my wife uses the traditional variety. It depends on which account's features and tax treatment appeal to you the most.
Offer from The Motley Fool: The 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*
Tom and David just revealed their ten top stock picks for investors to buy right now.
*Stock Advisor returns as of 1/30/2017.