But did you know that each of those accounts can be either a Roth or a traditional account? Or what that means?
Basically Roth vs. traditional is a question of
pay (your taxes) now or pay them later. Say you go the Roth route. You take $1,000 and invest it in a Roth IRA. You don't get a deduction for that $1,000, so that means you've already paid taxes on it. The money grows tax free (which is a wonderful thing), and when you're ready and eligible to start taking money from it, you don't owe any taxes on the distributions (because you've already paid taxes on it). So if you earn 10 percent on that $1,000 over 40 years it will become $45,000, none of which you will owe tax on when you pull it out to go on your dream vacations or whatever it is you want to do when you retire.
A traditional account is basically the reverse. You can deduct your contributions to your traditional retirement account, so you haven't paid taxes on them yet. They still grow tax free, but when you take the money out, you have to pay taxes on whatever you withdrawal.
Think of it like a highway. You take your little nest egg and you drive down the road of time and steady earnings. You've got to pay the tax toll at some point. The question is, do you want to pay it at the beginning, with a Roth, or at the end with a traditional. Generally, it's a better idea to pay the toll when you think the rate (i.e., your tax bracket) will be lower. For a lot of people starting out, you'll be in a lower tax bracket at the beginning of your career, so that would make a Roth a better choice. Personally, I like the idea of having the taxes done with and out of the way as well.
Obviously there are a lot of other ticky-tacky details that this explanation doesn't cover, but check this out for a more thorough comparison.
Tell us-- Do you think you'll open a Roth or a traditional retirement account?
Ask away-- Are there any terms you want defined or clarified?