It is always important to think about the future when it comes to personal finances. The main goal of most working Americans is to eventually retire and live out their lives in comfort and relaxation. This is the ideal, but with constant changes in the market, reaching this goal may not be as easy as one would hope. A lot of planning must be done to make sure that you are getting the most money when you retire so that you can live a comfortable life without worrying about money. The best way to start ensuring that you will have enough money by the time you want to retire is to start investing in retirement plans as soon as possible. Because investments work on the idea of interest, the longer your money is in an account, the more money they will make. This is dependant upon the market, of course, but you greatly increase your chances by investing early. The most common retirement investment plans available are Social Security, 401ks, and individual retirement accounts (IRAs). Many people have access to a 401k through their employer, and Social Security can’t really be counted on at this point, but these are topics for another time. On the other hand, IRAs can offer a sound retirement investment, but there are two types of IRAs available and it can be confusing which one will get you the most money for you at retirement.

To know which one is best for you and your situation, it’s important to know how they compare. In what ways are they the same and how do they differ? Both types of IRAs are taxed before they are put into the account, unlike a 401k that isn’t taxed until the money is taken out. Both accounts are set up by you, the individual and are not contributed to by your employer (note that Simple IRA plans can have employer contributions). Both have a 10% early withdrawal penalty, but both can be withdrawn from for qualified higher education expenses and for qualifying unreimbursed medical expenses without incurring a 10% early withdrawal penalty. Also, each has a contribution limit of $5000/yr before age 50 and $6000/yr for age 50 and above.

That is basically where the similarities end. There are a lot more differences between the two. First of all, although each is taxed before it is put into the account; with a traditional IRA you can receive a tax deduction for contributions. Roth IRAs do not offer any tax deduction when money is put into the account. On the other end, traditional IRAs are subject to federal income tax upon distribution (or withdrawal) whereas Roth IRAs are not under most circumstances. If the distribution doesn’t qualify to be tax free, only the earnings of a Roth IRA are taxable. Another difference between the two is that you can no longer contribute to a traditional IRA after the age of 70½, but there are no age restrictions for the Roth IRA. Along those same lines, with a traditional IRA, you must begin distributions by April 1 following the year you turn 70½ otherwise you get a penalty of 50% of the minimum distribution. Roth IRAs do not require any distributions during your lifetime. If you die before the account is exhausted, your beneficiaries will be subject to taxable forced distributions with a traditional IRA, but they will be subject to non-taxable forced distributions with a Roth IRA. In either case your beneficiary will not have to pay any estate tax if the inheritance is under the exemption amount.

Now that you know the differences between the two, you need to decide which IRA is the best option for you. This decision really comes down to how much money you think you’ll be making in the future. This is important because there are tax advantages to each depending on which tax bracket you are in. If you are in a lower tax bracket and you expect to stay in a lower tax bracket, a traditional IRA is a better choice for you. If you expect to be in a higher tax bracket when you retire, you should choose a Roth IRA because of the tax advantages it offers. If you choose to go with a traditional IRA you will be able to convert your money into a Roth IRA, but you can’t go from a Roth IRA to a traditional IRA.

This article makes it sound like a no-brainer to go with a Roth IRA, but that isn’t necessarily the case. There are a lot more intricacies you should understand before making the final decision. You should certainly consult a professional financial advisor at your local banking Massachusetts institution to look at your current financial situation and make a good prediction of your future financial situation to determine which type of IRA really will give you the most retirement dollars.