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

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

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  • Elliott GElliott G Member, Sofi Wealth Expert

    The main difference between a Traditional IRA and a Roth IRA is in the way they’re taxed. Traditional IRA contributions are tax deductible on both state and federal tax returns for the year the contribution was made, so they will reduce your taxable income when you earn the funds, however you will still owe income tax on the funds when you withdraw them later. Your savings will have a chance to appreciate tax-deferred, and you may be in a lower (or potentially higher!) tax bracket when it comes time to draw down the funds. At that time, your withdrawals will be taxed as ordinary income. Conversely, Roth IRA contributions come from post-tax income. In a Roth, you pay taxes on the funds before they go into the account, so in retirement your withdrawals are generally income tax-free. Both plans have the same contribution limits.

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