So you probably already know what a traditional IRA is, right? So, much like a plain-Jane IRA, a Roth IRA is another method of saving for your retirement and reap major tax benefits. The difference between the two is when you’ll enjoy those savings.
A traditional IRA will save you money on the front end — basically, you won’t be taxed on any contributions you make, bringing your end of year tax bill down immediately. For a Roth IRA, on the other hand, contributions are not tax deductible and won’t help you outrun the taxman in the short term. But after your magic 59 ½ birthday, when you’re free to start withdrawing from the account, the funds won’t be considered taxable income (unless the account is less than 5 years-old). In other words, it helps you outrun the taxman in the long-run.
Naturally, the IRS has many rules governing Roths. Like a traditional IRA, there are limits to your maximum yearly contribution. For 2018, it’s set at $5,500 for those under 50. And there is one combined limit for your Roth and traditional IRAs. What’s more: if you’re single and your income exceeds $118,000, you won’t be eligible to contribute the full $5,500. If you’re fortunate enough to make more than $133,000, you’re sadly out of luck Roth-wise. (If you’re married and filing jointly, you’ll have to make less than $186,000 to make the full contribution, and you become ineligible to contribute if you make more than $196,000.) All that is to say that big earners cannot fully enjoy the benefits of the Roth. It’s also worth noting that you can have a Roth IRA even if you’re a member of a qualified 401(k) plan.
But if you can contribute to a Roth, the benefits are well worth it. Besides the obvious advantages of not having to pay taxes on withdrawals, Roths yield another benefit: unlike Traditional IRAs, you won’t be required to take annual minimum distributions starting at age 70½, so you’ll be free to keep growing your savings tax-free throughout your lifetime.