A traditional IRA is considered a tax-deferred plan, meaning that eventually you’ll have to pay taxes on the money, just not now. So any contributions you make to a traditional IRA — up to $5,500 for anyone under 50 — will not be considered taxable income. So if you make $100,000 and make the maximum $5,500 contribution, the IRS will tax you as though you only made $94,500.
A Roth IRA is for the investor who doesn’t mind delayed gratification. Contributing to a Roth won’t help you an iota with your current year tax bill, but when you withdraw after you turn 59 ½, you’ll pay absolutely no income taxes on that money, so long as the account is more than 5 years old.
But note that there are also some major differences between the contributions the IRS will allow to these accounts. Anyone’s free to contribute $5,500 to a traditional IRA, and those over 50 can contribute as much as $6,500 to either a traditional or Roth IRA. But Roths aren’t available for big earners. If you’re single and your income is lower than $118,000, you’re eligible to contribute the full $5,500 to your Roth. If you make any more than that, you’ll be subject to a sliding scale that determines your maximum contribution (consult the IRS website for the particulars.) If you make more than $133,000, sorry, no Roth for you. (Those married and filing jointly will need to make less than $186,000 to make the full contribution, and will become ineligible once they make more than $196,000.) There’s one other major difference between the two. Once you turn 70 ½, you’ll be obligated to take annual minimum distributions from your Traditional IRA. Roths have no such rule so you’ll be able to keep growing that tax-free investment well into your Yoda years.