Traditional Vs Roth IRA, Shocking Test

Traditional Vs Roth IRA, which one is better for your investment? Which plan helps you reach your goals faster? Well that is something I have been wondering about.

See the main difference between a Roth IRA and Traditional IRA is how they are taxed. A Roth IRA taxes you up front which means you will not have to pay taxes on it in the future. A Traditional IRA on the other hand lets you put money into your account tax free and forces you to pay taxes on it when you take the money out.

I was kind of interested to see how this would affect any interest you would earn and which plan would be overall more profitable in the same market situations.

So I took an example where the average Joe would have $10,000 to deposit into the account and would be able to deposit an additional $400 into his account every month for 30 years while the account continued to grow at 10% annually.

I first looked at Roth IRAs. Assuming that Joe is being taxed 28% on his money he would only be able to start up his account at $7,200 and deposit $288 a month. After 30 years of 10% growth Joe would have $724,471 to retire with.

On the other hand if Joe invested into a Traditional IRA and did not have to pay taxes before depositing money into his account for the same time period he would have $1,006,210 after 30 years.

But wait, if Joe take out his money and pays the same 28% taxes on it he would have $724,471, the exact same amount he would have had if he invested into the Roth IRA instead.

Traditional IRA Vs Roth IRA who wins?

Although we all want to play with the new toy, the Traditional IRA is better for most people. This is because when most people retire they are in a lower income tax bracket. So instead of paying the 28% taxes on their money they might pay 15%.

Why Invest in Roth

A Roth IRA could be better if you are expecting to be in a higher tax bracket in the future. Maybe you are starting a business and believe it will put you into a higher tax bracket or maybe you believe taxes in general are going to go up.

Either way it all comes down to which plan will let you pay the least amount of taxes. And for most people it is the Traditional IRA. So when it comes to Traditional Vs Roth IRA most people would benefit from the first.

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