Process

• Traditional IRAs accept pretax contributions to the retirement account ; the earnings are taxed when you withdraw money from the account during retirement. Roth IRAs accept after-tax contributions; withdrawals during retirement are not taxed at all.
  
  

Significance

• The significance of both types of IRAs is that interest earned inside of the IRA is not taxed until later, if at all. This means that money that would normally go towards paying income tax is instead compounded over time inside of the account.
  
  

Benefit

• The benefit of deferred tax on interest in your IRA is that your IRA balance grows much faster than if it were taxed. This leads to a higher potential total retirement savings. This, in turn, leads to a higher retirement income.
  
  

Disadvantage

• The disadvantage of a traditional IRA is that tax on interest is only deferred. Eventually, you'll pay taxes on it. You must start withdrawing money from the account by age 70 1/2. The disadvantage to Roth IRAs is that the contributions are after-tax. This means you are effectively losing interest on some of the money that would ordinarily be contributed to the account. While interest isn't taxed in a Roth, the fact that you pay taxes on contributions offsets some of the benefits of the tax-free interest earnings.
  
  

Warning

• If you withdraw money prior to age 59 1/2 in either type of IRA, you will pay taxes on your interest earnings twice. The first tax is a penalty of 10 percent in the form of an excise tax. The second tax is ordinary income tax.