Roth IRAs are similar to traditional IRAs, but there is a major difference in the way contributions are made. Traditional IRAs allow individuals to deduct their contributions from their taxable income, whereas Roth IRAs do not. However, with the Roth IRA, the individual can withdraw his or her contributions (and earnings) at any time without having to pay taxes on them.
Roth IRAs are generally favored over traditional ones by investors who are in a high tax bracket during their retirement years because of this major difference.
A Roth IRA is an individual retirement account that allows the user to invest money into stocks, bonds, mutual funds or certificates of deposit on a post-tax basis. Contributions to Roth accounts are not deductible.
However, unlike traditional retirement accounts (such as 401(k)s), which provide tax advantages only at the time contributions are made, Roth IRA owners can take back their original investment (plus earnings) without having to pay any taxes on it. This makes them particularly useful for young investors who expect to be in a higher tax bracket during their retirement years.