As the Roth v. Traditional IRA issue has recently come up with a client of mine, I thought I would take a moment to briefly outline the tax advantages of each.
Traditional IRA Tax Advantages
The real benefit to a Traditional IRA is that any money you deposit into the IRA each year (up to the legal limit) can be deducted from your taxes.
That means the amount you deposit into your Traditional IRA can be used to reduce your tax burden. The presumption is that most people will invest in an IRA during the higher income producing years of their lives (30-55) to reduce their tax burden for those years.
The downside to the Traditional IRA is that all good things must come to an end. At some point you will be required to start withdrawing money from your Traditional IRA, and when you do each withdrawal is taxed as income. The presumption here is that you will be in a lower income tax bracket when you retire and the money you take out will be taxed at a lower rate than what it would have been when you were younger.
Roth IRA Tax Advantages
Unlike the Traditional IRA, contributions to the Roth IRA are not tax deductible. Instead, the benefit to the Roth IRA comes in the treatment given to the income from your contributions. In a Roth IRA, all income on contributions accumulates tax-free. This means the better your Roth IRA performs the greater the advantage of having your money in a Roth IRA. To be eligible for the tax free income treatment the contribution must have been in the account for at least five years. Also, unlike the Traditional IRA it is not mandatory that you take withdrawals from a Roth IRA during your lifetime.