What are the differences between a Roth IRA and a Traditional IRA?

What are the differences between a Roth IRA and a Traditional IRA?

A Roth IRA allows you to contribute after-tax income, meaning withdrawals in retirement are tax-free. A Traditional IRA, on the other hand, allows pre-tax contributions, which can lower your taxable income now, but you'll pay taxes on withdrawals in retirement.

Which one is better for me?

It depends on your current tax situation and future expectations. If you expect to be in a higher tax bracket in retirement, a Roth IRA might be better. If you want tax deductions now, a Traditional IRA could be more beneficial.

What are the contribution limits for each?

For 2023, the contribution limit for both Roth and Traditional IRAs is $6,500, or $7,500 if you're age 50 or older. However, income limits apply for Roth IRAs.

Can I convert my Traditional IRA to a Roth IRA?

Yes, you can convert a Traditional IRA to a Roth IRA. However, you'll need to pay taxes on the amount you convert, as it will be treated as taxable income.

What are the penalties for early withdrawal?

For a Traditional IRA, early withdrawals before age 59½ typically incur a 10% penalty plus taxes. For a Roth IRA, you can withdraw contributions tax-free at any time, but earnings may incur penalties if withdrawn early.