These days, no two words get me revved up more than “early retirement.” Not to sound like my father, but as I get older, the more obsessed I am with learning absolutely everything I can about financial independence. Because money doesn’t buy happiness, but it does buy flexibility.

Oh wait, I sound exactly like my father.

Retirement may be on our radar, but did you know that 1 in 3 Americans have no retirement savings? Yowza.

Last week, we took a deep dive into the Roth IRA and why you should strongly consider opening one.

Here’s a quick Roth IRA refresher:

• The standard deposit requirement is usually $1,000 minimum.

• You can only contribute up to $5,500 per tax year. Unless you are over 50, then you can contribute $6,500.

• Roth contributions (but not earnings) can be withdrawn penalty- and tax-free at any time, even before age 59½.

• There is a salary restriction. So if you make over $118,000 (or $186,000 if you’re filing jointly) first of all, congrats on attaining what those in the financial world officially call “baller status.” Secondly, you have surpassed the Roth IRA and can’t contribute to one anymore.

• If possible, max that bad boy out every year. You’ll probably (hopefully) earn more money and land in a higher tax bracket as you get older, so why not pay fewer taxes on the money you invest now rather than paying more taxes on money you take out later.

These are just the basics, but you can read more details about Roth IRA eligibility here.

So what’s the difference between a Roth IRA and a Traditional IRA?

Their main distinction is when you pay taxes on it. Most or all of your Traditional IRA contributions could be tax-deductible — meaning your taxable income will be lower the year you contribute — and withdrawals in retirement are taxed at ordinary income tax rates. Remember, your Roth IRA contributions are after-tax dollars, and you catch your break when you withdraw your earnings tax-free in retirement.

Very, very crudely summarized: Traditional IRAs let you avoid taxes when you put the money in, while Roth IRAs let you avoid taxes when you take it out for retirement.

Age restrictions

• Unlike the Roth IRA, anyone who is younger than 70½ can contribute to a Traditional IRA. However, whether or not the contribution is tax deductible depends on your income and whether you have a 401(k).

• If you are under 59½, you can withdraw up to $10,000 from your account without the normal 10% early-withdrawal penalty to pay for certain expenses, such as your first home. And, you’ll still pay taxes on the distribution.

• Like the Roth IRA, you can contribute a maximum of $5,500 annually if you’re under 50, and $6,500 if you’re over 50.

Get more details on IRA deductions

Income limits

• Again, unlike the Roth IRA, there's no maximum income limit for a Traditional IRA, however the amount you are allowed to contribute annually could be impacted by your income.

Withdrawals

• You'll pay ordinary income tax on withdrawals of all traditional IRA earnings and on any contributions you originally deducted on your taxes.

• Remember the items on our Roth IRA action list? Hint: It was nothing. Same here — you’ll see the highest growth and best return if you leave your money in your account until retirement and don’t mess with it. Compound interest is a sparkly, magical, miraculous unicorn, and you should let it do its thing.

Of course, there are all kinds of rules and restrictions, but you can do more comparing and contrasting Roth IRAs and Traditional IRAs here.
 

Quick recap:

• Roth IRA — avoid taxes when you take it out in retirement.
• Traditional IRAs — avoid taxes when you put the money in.
• Both —  avoid taxes altogether on the growth of your contributed funds, as long as they remain in the account.

 Which would you choose? A Roth or tradish? I’m curious what your retirement plan is — let me know in the comments below!