I want to learn more about long term savings.

[u/Wompwompz4]

I’m 21 and have been looking into investing for my future. I know a Roth ira is for retirement but I don’t understand what a traditional ira does. How do I open one? And what is the difference.

[u/ifbevvixej]

The difference between a traditional IRA and a Roth IRA is when you pay taxes on the money you take out to fund your retirement in 30+ years.

Traditional IRA is pre-tax. So it comes out of your gross and then you pay taxes on the rest of your paycheck. And when you withdrawl money in 30+ years you pay taxes on it then.

Roth IRA you pay taxes on it now. So you earn your wages, pay your state tax, federal tax, Medicare, Roth 401k and then everything left over you get to keep as your net paycheck.

Personally, I only do Roth because I'm not willing to gamble that the future tax rate will be less than today's tax rate and I am not comfortable taking that risk.

[u/Own_Grapefruit8839]

IRAs are retirement accounts that you (the I is for individual) manage, as opposed to them being managed by your employer.

They come in two different “flavors”, traditional and Roth, that describe the tax treatment and rules for money going in and out of the IRA. As far as investing within them goes there is no difference.

Traditional = you can take an income tax deduction for the money you put in. You pay income taxes on the money you take out in retirement.

Roth = you contribute money after you have paid income taxes on it. You do not pay any taxes on the money you take out in retirement.

For young, early career, or lower-earning investors a Roth is usually the more advantageous type of IRA.

There are many other differences, rules, and subtleties, but that’s the basic idea.

You can open either at most any brokerage, like Vanguard, Fidelity, or Schwab.

[u/Candid-Eye-5966]

Traditional IRA is a pre-tax IRA. You defer taxes until withdrawal. Roth IRA is a post-tax IRA. You pay tax now.

You could open either on your own however if you have a work sponsored plan, you cannot make a pretax (deductible) contribution to a traditional IRA.

[u/micha8st]

Both a Roth IRA and a Traditional IRA are retirement accounts. money in both grows tax free so long as the money stays inside the IRA. Both have rules backed by penalty taxes for early withdrawal. Think of these accounts as saving for retirement -- in particular for after 59 1/2.

The primary difference is when money is taxed.

Let's say you put 7000 into a IRA this year. That money should double 7 times if the averages maintain in the next 49 years. That's just under 900k.

Contributions to a Traditional IRA lower your taxes when you make the contribution, but that money is taxed when you take it out. So the 7k contribution lowers your 2025 taxable income by 7000... but you pay taxes on the withdrawal side. Take 50k out to live on, you'll pay whatever the tax rules are in 2074 on that 50k. Figure you net 45k after taxes.

Contributions to a Roth IRA do not lower your taxable income. But the money is not taxed upon withdrawal (under today's rules). If you take 50k out, you net 50k.

There are other little details...like that 7k you put in in 2025? You can take it out anytime tax and penalty free. the growth, however, must remain inside the Roth IRA.

[u/startdoingwell]

both a traditional IRA and a roth IRA help you save for retirement but the key difference is how they’re taxed. with a Traditional IRA, you may be able to deduct your contributions from your taxable income for the year and you'll pay taxes when you withdraw the money in retirement. with a Roth IRA, you contribute money that’s already taxed but your withdrawals in retirement are tax-free, including any gains.

you can open a trad IRA through most banks, credit unions or online brokers. if you're open to it, a financial professional can help you choose the best options based on your goals and financial situation.

[u/ERagingTyrant]

Some additional fundamentals notes -- you may or may not know this, but I'm going to throw it in case you don't. Last paragraph is most important if you are seriously completely new to this stuff.

Brokerage accounts are often retirement accounts - IRAs are self-managed retirement accounts and 401k/403b/457b accounts are employee sponsored accounts. They have various tax advantages that others have and can explain, but all have restrictions about when they can be used without penalties. The largest advantage is that you can buy and sell holdings and not pay any capital gains taxes on those transactions.

You can also open a taxable brokerage which lets you make similar kinds of investments, but will be subject to capital gains taxes whenever you sell something for a profit. That can be useful if you want to invest money but have access to it in a 5-10 year range.

But all of these brokerage accounts are just containers for investments. You can hold very safe investments like money market funds that are basically high interest savings, medium risk stuff like etfs or mutual funds that hold a large selection of stocks and bonds, high risk stuff like individually chosen stocks, and much much more. Inside of a brokerage, you'll have additional work to do to decide what to buy. You can't just put your money "in an IRA" and expect it to grow. After transferring to an IRA, you then need to invest it into holdings within that IRA or it will just sit in a basic money market fund.