In more detail
A traditional IRA may give a tax deduction now and taxes withdrawals as income later; a Roth IRA is the reverse. The deduction can be limited if you or your spouse are covered by a workplace plan and your income is above set thresholds. Withdrawals before age 59½ generally owe an extra 10% tax unless an exception applies, and traditional IRAs are subject to required minimum distributions later in life. Money from a 401(k) can be rolled into an IRA when you leave a job. Contribution limits and income rules are set by law and change, so check current figures.
Why it matters
The choice between traditional and Roth is a bet on your tax rate: deduct now if your rate is higher today, pay tax now if it will be higher in retirement. Missing the contribution deadline loses that year's allowance for good.
Example
At the same 22% tax rate now and later, both types end equal. $5,000 a year in a traditional IRA at 7% for 30 years grows to $472,303.93; after 22% tax on withdrawal, $368,397.07. Paying the tax first and putting the remaining $3,900 a year into a Roth IRA grows to exactly $368,397.07, tax-free.
Common confusion
An IRA is opened by you; a 401(k) is offered through an employer, with higher limits and often a match.