An IRA is essentially a savings account for individuals. It provides substantial tax breaks and allow you—an individual saver—an additional option to save for retirement. Unlike an employer-sponsored 401(k) plan, IRAs are accounts that you open on your own. IRAs can also be opened by self- employed individuals and small business owners.
There are several types of IRAs, but individuals need to decide between a Traditional IRA or a Roth IRA.
What’s the difference?
The primary difference between a Traditional and Roth IRA account is apparent when you pay income taxes on the money you put in the accounts.
With a Traditional IRA, you pay the taxes on the back end when you withdraw the money in retirement. In some cases you may escape taxes on the front end when you put the money into the account. The opposite is true for a Roth IRA; you pay taxes on the front end, and there are no taxes on the back end when you withdraw the money in retirement.
There are other differences, too. While almost anyone with earned income can contribute to a traditional IRA, there are income limits for contributing to a Roth IRA. As a result, not everyone can take advantage of a Roth IRA.
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