The question of whether to contribute to a traditional or Roth IRA has been the subject of much debate. Let’s look at some key points and see what might be best for you.

First, what is an IRA? It is an Individual Retirement Arrangement. The money contributed is typically invested in stocks, bonds, and other investment vehicles and grows tax-deferred until withdrawal. At this time, an individual will pay ordinary income taxes on withdrawals. An IRA can be established for individuals, spouses, or even children under the age of 18.

The differences between traditional and Roth IRA include:

Tax treatment

Traditional IRA contributions qualify for a tax deduction and lower your taxable income. Roth IRA contributions are not tax-deductible, but you still pay no taxes on investment gains or withdrawals. That means that with a Roth, your money will grow faster because you won’t be taxed along the way.

Withdrawal rules

In general, you can start withdrawing money from a Traditional IRA as soon as you reach age 59.5, but you will pay taxes on those withdrawals. With a Roth IRA, the account must be held for at least five years, and you must be 59.5 or older before any withdrawal without penalty (there is a fee to withdraw contributions).

Don’t confuse a Roth IRA with a traditional IRA. The only way to fund a Roth is through your contributions. You cannot transfer money from a traditional IRA into a Roth IRA.

Income eligibility

Not everyone is eligible to contribute to either type of IRA. Traditional IRAs are for people whose earned income (wage, salary) is below a certain amount each year and who (for the year in question) do not qualify as “non-working spouses” or “full-time students.” You can contribute based on your adjusted gross income (AGI) and your tax filing status.

Roth IRA eligibility is somewhat more complicated and is based on a combination of factors that include modified adjusted gross income, tax filing status, and earned or unearned income. If you are married, the rules state that if one spouse has eligible earned income, both spouses can contribute up to the maximum amount. If neither spouse has eligible income, then the contribution is based on whether or not either earns unearned income.

In summary, a Roth IRA might be the better option if you expect to be in a higher tax bracket when you withdraw from your account. If your income is low now but will rise dramatically by retirement, a Traditional IRA may work better for you.