Good question!
Two of the most popular Individual Retirement Account plans are the traditional IRA and the Roth IRA. The main difference between the two is when you get taxed.
- In a traditional IRA, you generally don't pay taxes on your contributions and earned interest until you make withdrawals. In other words, you're getting a tax deduction now and will pay the taxes later when this investment is withdrawn, according to the distribution age requirements.
- In a Roth IRA, you don't get to deduct your contributions. However, because Roth IRAs are funded with after-tax dollars (money that's already been taxed), you'll pay taxes on your contributions but won't pay taxes when you withdraw them in the future, if you meet the age distribution requirements.
To sum it up, you can either pay the tax now with a Roth IRA, or pay the tax in the future with a traditional IRA.
This is a great article written by TurboTax to explain this in more detail.
The fact that you inherited an IRA or Roth is great. But, the tax man has to be paid. If it was traditional, it will be when you take it out. But, if it was Roth, the taxes have already been paid.
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