Perhaps the biggest difference between a Roth IRA and a Traditional IRA is the way that contributions and earnings are taxed.
Any contributions made to a Roth IRA are made with after-tax dollars. Furthermore, you cannot claim a tax deduction for these contributions. Since you have already paid tax on any money that you have contributed to your Roth IRA, the funds in this account are free to grow tax-free forever.
In theory, these funds have no limit on how large they can grow without having to ever pay a penny in tax again.
On the other hand, contributions to Traditional IRAs are made with pre-tax dollars. Furthermore, these contributions qualify for a tax deduction in the year they are made. Investments in a Traditional IRA grow on a tax deferred basis. No tax is due until you begin making withdrawals. Withdrawals from Traditional IRAs are taxed at the individual’s ordinary tax rate.
Another major difference between these two forms of retirement accounts are the varying IRA withdrawal rules.
When it comes to funds invested into Roth IRAs, there are no mandatory withdrawal rules. An investor is free to leave their money into the account, and allow it to grow tax-free, as long as they want. Investors are even allowed to leave it to their heirs.
Traditional IRAs, however, have a completely different set of guidelines when it comes to taking withdrawals. If you have a Traditional IRA, you must start taking distributions by April 1st following the year in which you turn 70 ½.
The IRS code specifically outlines how much you are required to take, known as the required minimum distribution, via a complex formula that takes into account your age, life expectancy, and account balance.