Peter is a 40-year-old average income earner. He is ready to start planning for retirement, and plans to make the maximum possib
le contribution to an IRA, which is currently $5,000 per year. Because he still has 25-30 years until retirement, Peter wants to invest most of the contributions to the IRA in higher risk securities. His hope is that, when the economy is strong, he'll make some large gains on the account. At this point, which type of IRA would be best for Peter, a Traditional or Roth IRA? I think the answer would be a Roth IRA. I'm not all that sure though.
Roth IRA doesn't get you a tax deduction for the contributions, but the earnings grow tax free and you don't pay tax on the withdrawals after retirement. A traditional IRA gives you a tax deduction for the contributions at the time you make them, and the earnings grow tax free, but when you withdraw the money after retirement, you are taxed on it. The idea is that you are hopefully in a lower tax bracket at that point. So its only natural that Roth IRA is the best.
