An IRA that is not a Roth IRA or a SIMPLE IRA. Individual taxpayers are allowed to contribute 100% of compensation (Self-employment income for Sole proprietors and partners) up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and coverage by an employer-sponsored retirement plan.
An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first Roth IRA and when he/she is age 59.5, disabled, using the withdrawal to purchase a first home (limit $10,000), or deceased (in which case the beneficiary collects). Because qualified distributions from a Roth IRA are forever tax-free, some argue that a Roth IRA is more advantageous than a Traditional IRA.
The Roth IRA is the simplest - and potentially the most effective - sheltered account imaginable: It has a tax structure unlike that of any other IRA: contributions are post-tax, but growth is tax-free; once you put your money in, you never pay taxes again. It's more flexible: since you have already paid taxes up front, there are no minimum distribution requirements.
Since withdrawals are not reportable income, they won't affect your adjusted gross income during retirement. The Roth IRA also has one potential downside: You pay taxes while working rather than when retired, when your tax rate is likely to be lower; so the Roth IRA loses one of the advantages of the traditional IRA. Does the Roth IRA really offer any advantage over the traditional deductible IRA? The answer is a definite "Yes", although the reasons can be subtle.
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