There are some very key differences between these two types of IRAs and we’re going to get right into it.

Roth IRAs

• You make your contributions using your after-tax money
• When you withdraw your money it will be tax-free. So let’s say you grow your portfolio to $2 million,  you won’t have to pay any tax on this when you start withdrawing. (*See Note Below)
• You may be able to make penalty free withdrawals before you reach the age 59 1/2 if you meet certain criteria. (*See Note Below)
• You need to make below a certain income to be able to make contributions. (For 2015  Single filers full contribution: up to $116,000, Joint filers full contribution: up to $183,000)
• Do not require you to take any withdrawals at any age.

Traditional IRAs

• You make your contributions with before tax money.
• If you make an early withdrawal before the age 59 1/2 you will be taxed at your ordinary tax rate and a 10% penalty may apply. (#See Note Below)
• Your withdrawals will be taxed at your ordinary income tax rate. So if you grow your portfolio to $2 million dollars, you will have to pay tax on your withdrawals at whatever your tax rate is at the time of withdrawal.
• Make you to take a required minimum distribution (RMD) starting at age 70 1/2.

*A distribution from a Roth IRA is federally tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½ or older, qualified first time home purchase, or death.

# For Traditional IRAs, penalty-free withdrawals include but are not limited to: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.

So now the real question is which one should you invest in? I have to give you the answer that everyone hates, it depends. The most important factor in making that decision is what you think your tax rate will be when you retire? We have no way of knowing what tax laws and brackets will be like several years from now but if you anticipate you’ll be earning a much greater income in your retirement years than you do currently then you might be better off with a Roth IRA. Therefore, you pay taxes now on your contributions while your income and tax bracket are lower and in your retirement years when you are earning a higher income and possibly in a higher tax bracket, you won’t have to pay any taxes on the money you withdraw.

On the flip side,  if you are earning a high income now but do not expect to be earning as much in your retirement years then you should look closely at a Traditional IRA. This way, you don’t pay any taxes now while you’re in a higher tax bracket and in your retirement years when you’re earning less, you’ll pay taxes on that lower income and lower tax bracket.

One other very important note on this topic. The rules on IRA’s are always changing. Make sure to contact your tax professional to get the most up to date information and to help you make the best decision for your individual situation.