The two fundamental tax treatments available in IRAs and qualified retirement plans.
Traditional IRAs and qualified retirement plans allow for tax deductible contributions to certain dollar limits and within certain income limits. Income and capital gains are non taxable, but withdrawals are taxed at the ordinary income tax rate.
Roth IRAs and Roth retirement plans do not allow for tax deductible contributions. Like traditional plans, income and capital gains are non taxable, but unlike traditional plans, qualified withdrawals are tax free.
The choice of traditional versus Roth treatment can be complex, but traditional plans are generally a good choice if the current tax bracket is higher than the expected tax bracket in future years when withdrawals will take place. For example, an investor who is in the peak earnings years, and who is expected to be in a lower tax bracket after retirement will benefit from a traditional plan.
Conversely, the Roth plans are a good choice if the current tax bracket is lower than the expected tax bracket in future years when withdrawals will take place. For example, a young investor who is just beginning a promising career, but with a low current income and who expects to be successful enough to always be in a higher tax bracket, even in retirement, will benefit from a Roth plan.