What is ROTH IRA?
Imagine you have a toy. You pay for the toy with money you already paid taxes on. Then, you keep the toy for a long time, and when you finally want to sell it, you get to keep all the money without paying any extra taxes! That's like a Roth IRA – you pay taxes on the money before you put it in, and it grows tax-free.
What is TRADITIONAL IRA?
Now, imagine you want that same toy, but you get a discount on it now because you promise to pay taxes on it later when you sell it. That's like a Traditional IRA – you don't pay taxes on the money you put in now, but you will have to pay taxes when you take it out later.
Key Differences
The biggest difference is when you pay taxes. With a Roth IRA, you pay taxes upfront. With a Traditional IRA, you pay taxes later. Another difference is who it's best for. If you think you'll be earning more money later, a Roth IRA is often better. If you think you'll be earning less, a Traditional IRA might be better. Finally, both have limits on how much money you can put in each year.
When to Use Each One
Let's say you're a young artist selling drawings. If you think your drawings will become super famous and valuable later, a Roth IRA is a good choice. You pay taxes on the little bit of money you make now, and when you sell your super-valuable drawings later, you keep all the money tax-free! On the other hand, if you're a student working a part-time job and don't make much money, a Traditional IRA might be better. You get a small tax break now, and you pay taxes later when (hopefully!) you're earning more.
The Bottom Line
Both Roth IRAs and Traditional IRAs are ways to save money for the future. The main difference is when you pay taxes. If you think you'll earn more later, choose a Roth IRA. If you think you'll earn less, choose a Traditional IRA. It's like choosing when to eat your dessert – now or later! Talk to a grown-up to help you decide which one is best for you when you start saving.