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What is the Difference Between a Roth IRA and Traditional IRA?

What's the difference between a Roth IRA and a Traditional IRA? We get asked this question very frequently, so we put together a breakdown of the two. Watch this week's Arista Advice to find out.

Full Transcript:

Hello, welcome to Arista Advice. Question of the week is: "What is the difference, Paul, between a Roth and a Traditional IRA?" 

This question comes up on a recurring, frequent basis, so let's talk about it again. 

Number one: There are three buckets in which all of your account types fall under: a taxable, tax-deferred, and tax-free. Let's talk today about the tax-deferred and the tax-free. 

A tax-deferred account is a traditional IRA. The third bucket, a tax-free bucket, is a Roth IRA. The taxable bucket holds all of your non-retirement funds, such as individual accounts, joint accounts, paychecks, savings accounts, checking accounts, bank accounts, or trusts.

The tax-deferred holds your 401(k), your IRA, your HSA, Annuity. Those are tax-deferred vehicles. 

Tax-free vehicles are very few and small in between. It's really a Roth feature in a 401(k) and/or a Roth IRA.

IRAs are a great tax advantage investment account that has the capacity to elevate your retirement. The question is what is the difference between the two types of IRAs. 

A traditional IRA, above-the-line deduction for contribution amounts is one benefit.
A second benefit is that the deduction phases out as income increases.
A third benefit is money grows tax-deferred, and a fourth option is you pay taxes on the larger amount that you gain throughout the life of the account.

Roth IRAs - they are tax-deferred investment vehicles. Taxes are paid on the front-end, before tax, and the money grows tax-free and comes out tax free. If you hit and satisfy the two requirements of five years and over age 59 and 1/2, and the third feature: all gains and principles grow tax-free, and they come out tax-free either to you or the beneficiary and/or to your children or charity that you list as the beneficiary of your Roth IRA.

Remember, go to AristaWealth.com to look at tools, tips, and videos and to learn more and to help you have financial success.