Roth IRA vs. Traditional IRA, Explained Simply

An IRA — Individual Retirement Account — is a special account that helps your money grow with tax advantages. There are two main flavors, and the difference comes down to one thing: when you pay taxes.

Traditional IRA: tax break now

You put money in before taxes, which can lower your tax bill this year. Your money grows untouched, and you pay taxes later when you withdraw it in retirement. Good if you want the deduction today or expect to be in a lower tax bracket later.

Roth IRA: tax break later

You put in money you've already paid taxes on. It grows, and in retirement you withdraw it — including all the growth — completely tax-free. No tax bill on decades of gains.

Why a Roth often wins in your 20s

When you're young, you're usually in a lower tax bracket than you'll be later, so paying the tax now is cheap. And because you have decades for the account to compound, that tax-free growth can be enormous. For many young people just starting out, the Roth IRA is the simplest powerful choice.

The catch (and the rules)

• There's an annual contribution limit, and Roth IRAs have income limits at higher earnings.
• This is a long-term account — it's meant for retirement, not next year's vacation.
• You open one yourself at a brokerage; it's not the same as a workplace 401(k).

Either account beats doing nothing. If you're unsure and you're young, a Roth IRA with a low-cost index fund inside it is a hard combination to beat.