How is Roth IRA different from Traditional IRA?

Traditional IRA is an individual retirement account which is not tax exempted unlike Roth IRA. Traditional IRA provides the retirement plan to anyone irrespective of their income or age. However, unlike Roth IRA, Traditional IRA is not a suitable plan for people who would be paying more taxes after retirement as this does not provide withdrawals without taxes but charges a certain amount of tax on the amount. The return on investment of Roth IRA is better than that of Traditional IRA.

Investment Limits
Similar to Roth IRA, Traditional IRA has the maximum limit of contributions per year (for 2015) set at $5,500 and $6,500 for senior citizens aged above 59 years. Roth IRA has set certain limits for different income groups. But Traditional IRA allows anyone to contribute money in their scheme, i.e. has no income bars. This allows people from all income groups to contribute in Traditional IRA. From this perspective, the return on investment for both Traditional as well as Roth IRA is comparable.

Withdraw money without paying tax:
Contributors can withdraw money anytime in Roth IRA without paying any tax but they have to pay taxes for withdrawal of pre-tax contributions or any earnings when distributed in Traditional IRA. Also, withdrawal of money before the age of 59 and a half will be subjected to a 10% early withdrawal penalty only if there is no exception involved in that particular case. A non-qualified distribution in Roth IRAs is subjected to taxation of the income of the individual and a 10% additional tax will also be charged in normal cases.

In the case of Traditional IRA, the respective contributions lower the gross annual income of the individual officially allowing the person to invest in other schemes and retirement plans as well which he will not get normally. Roth IRA does not lower the gross income but allows certain relaxations for people with lower gross income.

Now that you have a clear idea about various IRA plans, you can go ahead and make plans to invest in the scheme of your choice so as to get a proper return on investment. Nobody wants to risk the future of their hard earned money after their retirement!