How do you decide between Roth IRA or Traditional IRA?

Question

Also, what is the rate of growth over 20-25 years?

Answer 1

A traditional IRA provides an immediate tax savings for the year you make the contribution whereas a Roth IRA is funded with after-tax dollars (no current year tax advantage).

Both types of IRA grow without tax being owed yearly. However, the Roth IRA is entirely tax free when the money is withdrawn, while a traditional IRA is taxed (your contributions plus earnings) when the money is withdrawn.

A traditional IRA requires that you start withdrawing money (and paying taxes) in the year that you reach 70 1/2 yrs old. You never have to withdraw money in a Roth IRA.

If you can afford to make the maximum IRA contribution each yr with after tax dollars, the Roth IRA is a much better deal (no future taxes).

The growth rate over 20 - 25 years depends on the types of investments you hold in the IRA. The average growth rate can't be predicted, but you can assume that stocks will tend to have a higher rate of return than will bonds over the long run..

Answer 2

The actual investment options are EXACTLY the same. The long term average return of the US stock market is about 12%. If you have 20+ years, a Roth IRA is better. NEVER paying tax on 20 years of earnings is guaranteed to be a better return than deferred taxes on the same earnings even with the current deduction.

Answer 3

The growth rate depends on what kind of investments are in the IRA.

Go to this site to read up on both traditional and roth IRA's.

http://www.fool.com/money/allaboutiras/allaboutiras03.htm