The Basic Differences Between a Roth and a Traditional IRA
Roth contributions are not tax deductible while the earnings and principal are 100% tax free if rules and regulations are followed. The principal contributions can be withdrawn any time without penalty (subject to some minimal conditions) with a Roth IRA. You would pay penalties if you withdraw earnings before retirement age. When you reached retirement age, you would be able to withdraw all of the money 100% tax free. There is no mandatory distribution age with the Roth. Only Single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually are eligible for Roth IRAs.
Where taxes are concerned, the Traditional IRA is reverse from the Roth. Traditional IRA contributions are tax deductible depending on income level, but taxes are paid on earnings when withdrawn from the IRA. The Traditional IRA is referred to as a Tax Deferred investment. All funds withdrawn from a Traditional IRA, including principal contributions, before age 59 1/2 are subject to a 10% penalty. There are some exceptions. Traditional IRAs are available to everyone with no income restrictions while Roth is available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
Both allow funds to be used to purchase a variety of investments such as stocks, bonds, certificates of deposits, etc. IRAs of both types can be opened through a banks or brokerage houses.