What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?

Question

What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA? Do I want to make a guaranteed return of 6% or 8% ? Do I want to pay taxes now or later? Do I want to take advantage of my employer’s matching contribution? Do I want to take on more or less risk?

Anonymous · Answer

The most relevant question an investor should ask when deciding between a Roth IRA and a Traditional IRA is:

“Do I want to pay taxes now or later?”

This question addresses the fundamental difference between the two types of IRAs:

Roth IRA: Contributions are made with after-tax dollars, meaning you pay taxes on the money before it goes into the account. However, the money grows tax-free, and qualified withdrawals during retirement are also tax-free.
Traditional IRA: Contributions are typically made with pre-tax dollars, meaning you get a tax deduction for the amount you contribute (subject to income limits and other factors). The money grows tax-deferred, but you pay taxes on withdrawals during retirement.

Anonymous · Answer

Do I want to pay taxes now or later?

What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?

2 Answers