Course 204: Individual Retirement Accounts
The Difference Between Traditional and Roth IRAs
In this course
1 Introduction
2 How to Invest in an IRA
3 The Difference Between Traditional and Roth IRAs
4 The Roth Advantage

Many investors qualify for a tax break, either up front or when they withdraw the money from the account.

For those who qualify (consult the IRS' site to determine if that's you), a traditional IRA provides an up-front tax savings.

For example, if youare married and filing jointlyand neither you nor your spouse was covered by an employer-sponsored retirement plan, all of your contribution to a traditional IRA plancould betax deductible. (To learn about your individual situation, however, consult the IRS Web site at

You will pay taxes on your investment gains when you withdraw from a traditional IRA account. Currently, money withdrawn from your traditional IRA account is taxed as ordinary income at retirement.

The Roth IRA doesn't provide any up-front tax advantages the way a traditional IRA does. Contributions are not tax deductible. But once you begin withdrawing from a Roth IRA in retirement, all your earnings are tax-free. The only catch: You have to have invested money in this account for at least five years before you take any money out.

If you convert a traditional IRA to a Roth IRA, you'll pay taxes on deductible contributions and earnings made up to the point of conversion. But as soon as the money is placed in a Roth, it grows tax-free. (Note: The Tax Increase Prevention and Reconciliation Act of 2005 allowed anyone, regardless of income level, to convert a traditional IRA to a Roth IRA in 2010 and beyond.)

Next: The Roth Advantage >>

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