One of the most frequent questions I get asked is if someone should contribute to an IRA or a ROTH. This is a great question and should be analyzed carefully because the net result can add up to hundreds of thousands of dollars difference.

To start out, an IRA contribution is put in prior to paying tax; it then grows tax deferred and when you pull the funds out you pay income tax on the distribution amount. A ROTH contribution is put in after tax, grows tax free and when you pull the funds out you don’t pay any tax. This is in very simple terms so make sure you’re aware of any early withdrawal or time penalties. In the past the myth used to be defer, defer, defer any tax possible, meaning you would want to contribute to an IRA. This came from the notion that people would need less income in retirement and therefore drop tax brackets. I don’t know about you, but I seem to spend more money when I am not working (other than running, my hobbies are expensive). If I pulled funds from my IRA it would increase my taxable income, but if I had money in a ROTH and pulled it out, my taxable income would stay the same. So, sometimes a ROTH may be a more appropriate recommendation than an IRA, especially for people who tilt between the 12 and 22 percent tax bracket.

Every individual or couple is going to be different in their spending habits and incomes, so evaluating these both currently and for what is expected in the future will determine if an IRA or ROTH is best for you. For some people this decision can add up to make tens if not hundreds of thousands of dollars difference during retirement. There is no easy way to know which one is correct for you without doing some projections and figuring out where your income will come from and how it will be taxed. Before rushing into the decision of an IRA or a ROTH, take the time to do the analysis and make an educated decision. In the end it could make all the difference for a successful plan.