Is it Better to Have a Roth or Traditional IRA?

Saving for retirement can be very confusing. We accept that Social Security will not be a given for most of us, and that we have to have something set aside to make sure that we can actually stop working at some point in our old age. Pensions are but an urban legend for most employees at this point.

But how do we decide where, how and with whom to park our future?

It really all seems very confusing, especially for those of not very financially savvy to the ways of the financial world.

The gist is, you need to save SOMETHING.

Tax breaks are the major differing point in IRAs, or Individual Retirement Accounts. Do you need a tax break now, or will you in the future? This is hard to predict. Logic would say that as you are younger, you will probably earn more money in the future, and therefore pay higher taxes. With a Roth IRA, you pay the taxes now on what you invest (not pre-tax earnings) so while you earn less, you pay less tax on what you invest.

Whenever you take that money out, you don't pay taxes on it.

That isn't to say there wouldn't be penalties on it. They want you to have the money for a certain length of time, say five years, and they don't want you to withdraw whatever interest you have earned on it. But if you have been paying in for ten years and decide to buy a house, you can take the money out for a down payment and not be penalized. Not a bad deal, but you really do not want to have to take away from your retirement money, ever, if you can help it.

If you are already making good money, and are paying out the nose on taxes, then the traditional IRA might be best for you. You can get your tax break now, before you have dependents or other things that will ease your tax burden.

Neither IRA demands a certain contribution a year, although they do have maximums that you can contribute.

In general, the Roth IRA seems to be the better bet for most folks who aren't making much now, but will move up in life. Pay the taxes now, and benefit later.

The tricky part is, this is not an either/or situation. You can have both types of IRAs.