Comparing Roth vs. traditional IRAs

IRAs work alongside a workplace 401(k) or on their own. They're especially useful if your job doesn't offer a retirement plan or if you're self-employed.

How does an IRA work?

You open an IRA with a financial company, put money in, and choose how to invest it. The account itself is just a container. What grows your money is what you invest in (index funds, target-date funds, stocks, or bonds).

You can contribute in one lump sum or a little at a time. Plenty of people set up automatic transfers, like $25 every payday.

Traditional IRA

• Taxes now: Your contributions may be tax-deductible, which lowers your taxable income for the year. Whether you can deduct them depends on your income and whether you or your spouse have a retirement plan at work.
• Taxes later: You pay income tax on everything you withdraw in retirement.
• Early withdrawals: Taking money out before age 59½ usually means income tax plus a 10% penalty, with some exceptions.

Roth IRA

• Taxes now: No tax break. You contribute money you've already paid taxes on.
• Taxes later: Withdrawals in retirement, including all growth, are tax-free if you're at least 59½ and have had a Roth IRA for five years.
• Early withdrawals: You can take out the money you contributed at any time, for any reason, with no taxes or penalties. Only the earnings are restricted.
• Income limits: $153,000 if you're single and $242,000 if you're married filing jointly.

Side by side

Which one is right for you?

A Roth IRA often makes sense if:

• Your income is low or moderate now and may rise later.
• You want flexibility to get at your contributions in an emergency.
• You want tax-free income in retirement.

A traditional IRA often makes sense if:

• You're in a higher tax bracket now than you expect to be in retirement.
• You want to lower this year's taxable income.

For many people with modest incomes, a Roth IRA is a good choice. Their tax break today would be small, and tax-free money later can be very valuable. You can also split your savings between both, as long as your total stays under the yearly limit.

How to open an IRA

• Pick a provider. Most large brokerages have no minimum to open an account and offer low-cost funds. Some banks and credit unions offer IRAs, too, often in savings accounts or CDs.
• Choose Roth or traditional.
• Link your bank account and make your first contribution.
• Invest the money. This step is easy to miss. Money sitting in cash inside an IRA won't grow much.

Timing and deadlines

You can contribute for a given year until the tax filing deadline the following spring.