Which is better, an IRA or a Roth IRA?
In addition to the other answers, I would only add one explanation: The Roth IRA and IRA conceptually both create a consumption tax system (as opposed to an income tax system), but they differ in the timing of their tax. Therefore, all other things being equal, from a purely tax-motivated perspective the IRA is better if your current tax rate is higher than your retirement tax rate. On the other hand, the Roth IRA is better if your current tax rate is lower than your retirement tax rate. An IRA works like a 401(k) plan — a deduction from gross income is allowed for contributions — that is, any money you invest in an IRA is not taxed to you currently as income. For example, if you have $10K income, but invest it all in an IRA, then you have taxable income of $0 and tax of $0. (But note Yoyo’s answer concerning the availability of the deduction.) If you allow the $10K to grow at 8% interest, tax-free for 20 years, you will have $46.6K interest, providing a total withdraw in year 20 of
