What are the two main types of retirement accounts?

The two main types of retirement accounts are the Traditional IRA and Roth IRA, which distinguish themselves primarily by their tax treatment and the timing of tax implications.

A Traditional IRA allows individuals to contribute pre-tax income, meaning that the contributions may be deducted from taxable income in the year they are made. As a result, the funds grow tax-deferred, and taxes are paid upon withdrawal during retirement, typically when individuals may be in a lower tax bracket.

In contrast, a Roth IRA is funded with after-tax income, which means that contributions do not provide a tax deduction at the time of contribution. However, the significant advantage of a Roth IRA is that qualified withdrawals in retirement are tax-free, enabling the account holder to escape taxes on the investment growth.

Both accounts are designed specifically for retirement savings and have distinct rules regarding contributions, withdrawals, and tax implications, making them the primary retirement options for individuals. Other choices such as savings accounts or different types of accounts like Health Savings Accounts and brokerage accounts serve different purposes and do not focus specifically on retirement savings.