You can contribute up to $5,500 per person (or $6,500 per person if over age 50) in 2018. You get a deduction on your 1040 for contributions to the plan. IRAs are not available or may be limited by your income if you have another type of retirement plan through your employer. The funds grow in the conventional IRA free of taxes until you remove them from the IRA. There are penalties for removing them before age 59½ except under rare circumstances and you must start taking minimum distributions by age 70½ . There is a general assumption that you will be earning less in retirement and when you withdraw the money you will pay taxes at a lower rate.
A Roth IRA works differently. With a Roth IRA you are contributing money you have already paid income taxes on. The money grows tax free and there are no federal taxes due (state taxes may be different but PA generally exempts all income from retirement plans if taken after age 59½). Roth IRAs however, have income limits on your ability to contribute. If you are single and make more than $135,000 per year you will not be able to contribute to a Roth IRA. If you are married filing jointly, you will not be able to contribute if your household income is above $199,000 per year. You can contribute to a Roth and a regular IRA in the same year but the contribution caps apply cumulatively.
Even if you’re limited with Roth contributions, you might still be able to get money into a Roth retirement account. The backdoor Roth involves contributing money to a traditional IRA and then converting that IRA to a Roth. Roth conversions have no income limits, making them available to anyone. The problem with the backdoor IRA is that it only works well if either you’re able to deduct the IRA contribution or you don’t have other IRAs with pre-tax money in them. If you can’t meet either of those two conditions, then a conversion can increase your tax bill, which is far from ideal. Another option is to see if your employer-sponsored retirement plan offers a Roth alternative. Many 401(k)s and similar plans have adopted Roth language, and unlike Roth IRAs, Roth 401(k)s typically have no income limits on participation.
For many a Roth IRA can be a nice retirement planning alternative to a conventional IRA account.