As a provision for retirement, the U.S. government created the individual retirement arrangement more than tweny years ago. We now refer to this as the traditional IRA for in 1998 Congress created an alternative called the Roth IRA which has several advantages over the traditional IRA in many cases. The Roth IRA is a very different animal than the traditional IRA and has many features that the original did not. For most people there are several Roth IRA advantages that we will look at. Let’s take a look at some of these advantages.

Far and away the preeminent advantage of a Roth IRA is that, upon reaching the retirement age, one can withdraw money without paying taxes on the gains. The alternative arrangement in the Traditional IRA allows one to take a tax deduction upon putting their money into the IRA but they have to pay taxes on it when they withdraw it. So it essence you are trading a small (but certain) tax break up front for a much larger (though uncertain) tax break later in life. The Roth IRA owes its tremendous popularity to this feature; the fact that money is allowed to grow and be withdrawn tax free.

In a traditional IRA, you do get the tax deduction on your initial contribution. However, later, when it is time to take distributions (withdraw your money) you will pay taxes on the sum gain realized in your account. Another issue is that the money upon withdrawal is taxed as income as opposed to as a capital gain. Therefore, if you are in the 28% income tax bracket, more than a quarter of your money will go to the tax man.

The major feature of both the Roth and Traditional IRA is that transactions within your account are not taxed. In a typical brokerage account, each transaction that has a gain is taxed. In the IRA you do not have to begin to think about taxes until your retirement (traditional) or never (Roth). Thus, if you have money to invest for the long term, an IRA is often your best choice because of the tax advantages.

Another advantage of the Roth IRA over the traditional IRA is that you are not forced to take distributions at any particular age. In a traditional IRA, once you reach the age of 70 and 1/2 you are required to begin to withdraw your money or you will face a penalty. In the case of the Roth IRA, however you are not required by law to take deductions at any age. As a matter of fact, you may, if you choose, keep funding your account until you reach 110 years old, assuming that you live that long.

Going forward, many have questioned how long the current tax treatment will remain in effect. There have been rumblings recently that Congress will change the tax code so that your money is no longer sheltered from taxes as is the case with the Roth IRA. It is a simple matter of economics. Many believe that government wants their cut of this money and so they will take it. Because of this, many wonder if the main argument in favor of the Roth IRA, the tax advantages, will become moot. Therefore, one disadvantage of the Roth IRA is that if the government does the change the rules for individual retirement arrangements you will have lost out on the tax deduction that you could have gotten up front if you had chosen to utilize the traditional IRA. At this point, it seems uncertain that the current system will be maintained indefinitely. If you have more than 10 years before you are set to retire you may consider opting for a traditional IRA for this reason.

This sums of the key differences between the Roth and Traditional IRAs. There are many other factors to consider when planning for your retirement including IRA limits and Roth IRA limits so make certain to do your due diligence before deciding on a course of action.

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