If you’re considering opening an IRA, you’ll need to decide whether you want to open a Roth IRA or a traditional IRA.
Roth IRAs and traditional IRAs differ in how and when you receive a tax break. Traditional IRA contributions are tax deductible, but withdrawals in retirement are taxable. Roth IRA contributions are not tax-deductible, but withdrawals are tax-free in retirement.
The majority of advice on the Roth IRA vs. traditional IRA topic begins with this question: Do you think your tax rate will increase or decrease in the future?
Depending on the answer to that question, you can pick the IRA that will save you the most tax: if you expect to be in a higher tax bracket in retirement, choose a Roth IRA with its delayed tax benefit. Choose a traditional IRA if you expect lower retirement rates.
When you’re decades away from retiring, it’s difficult to predict what your tax rate will be. Fortunately, there are other ways to determine whether a Roth IRA or a traditional IRA is right for you.
For those who qualify, it may be better to go with a Roth IRA rather than a traditional one.
Although early withdrawals from retirement accounts are normally discouraged, the Roth permits you to take contributions (money you put into the account, not profits) at any time without paying income taxes or incurring an early withdrawal penalty. If you take money out of a regular IRA before you retire, the IRS will be less forgiving: You’ll almost certainly be hit with a 10% early withdrawal penalty and will have to pay taxes on the money you take out at your current tax rate. There are a few exceptions to this rule — for more information, check our page on conventional IRA withdrawal requirements — but you’ll have to approach with far more caution than you would with a Roth.