Of course, nobody intends to remove funds from any IRA before retirement, so focusing on those tax benefits first affects the most people. In both the Roth and the traditional IRA, the funds grow tax-free. If you put money into a traditional IRA, you get to lower your taxable income by one dollar for every dollar you deposited. However, that benefit isn't available in a Roth. When you withdraw from the traditional IRA, you then pay taxes on the money you withdraw, since you got the tax deduction. You also must pay taxes on any interest or growth you made on your money, since, by deducting it from your income, you never paid tax on the money initially. The rules differ for the Roth withdrawal. You already paid tax on the money you put into the fund so there's no tax, you received tax-free growth and after 59½, you pay no taxes on the growth either.
Removing the funds from a Roth before the age of 59½ is also better for anyone with an emergency. Any money you take from a traditional IRA triggers tax and a 10 percent tax penalty-unless you remove it in equal periodic payments. However, since you already paid taxes on the funds that you invested in a Roth, you can remove all those funds without any penalty from the IRS. You do pay tax and a 10 percent penalty on any growth or interest on the money. The difference in tax savings can be almost half the funds you remove, depending on your tax bracket. At the least, it would be 10 percent of the funds.
When you put funds into a Roth rather than a traditional, there are no mandatory distribution rules at 70 1/2, as there are for a traditional IRA. If you leave the money to a spouse, it can become their Roth. You can also pass the entire fund to your children. There are withdrawal rules they must follow, but they'll receive the funds income tax-free if they follow these rules. You can leave a nice benefit to a loved one. While the traditional IRA has many immediate tax benefits, you'll love the Roth when it comes to withdrawing money.
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