Traditional vs. Roth IRA

1What's an IRA?

An IRA (Individual Retirement Account) is a personal account with special tax perks, built to help your money grow for the long haul. Inside it you can hold the same stocks, ETFs, and bonds you already met — the account is just a tax-friendly wrapper around them.

Why bother? Because of compound interest — your returns start earning returns of their own. Over decades that snowballs, and starting as a teen gives your money the most time to grow.

There's a catch that keeps it fair: you can only add so much per year (a contribution limit), and only from money you actually earned from work. The trade for the tax perks is that it's meant to stay invested until retirement.

2The one big difference: when you pay taxes

Both IRAs grow the same way. The only real difference is when the government takes its cut:

Roth IRA — you pay tax now, on the money going in. Then it grows and comes out tax-free in retirement. You pay tax on the seed, not the whole harvest.
Traditional IRA — you skip tax now (a break today), but pay tax later when you withdraw in retirement.

For a lot of teens, a Roth is the sweet spot: your income (and tax rate) is low now, so paying tax today is cheap — and decades of growth come out completely tax-free.

⚖️ Roth vs. Traditional — see it grow

Drag to set how much you invest and for how long. Both grow identically at an illustrative 7%/year — the difference shows up at the end, in taxes.

Monthly contribution $100

Years invested 30

Roth IRA

Tax paid now → tax-free later

You put in $0

Grows to $0

Yours in retirement

100% tax-free 🎉

Traditional IRA

Tax break now → taxed later

You put in $0

Grows to $0

Yours after ~22% tax

but you got a tax break each year

Illustrative only — assumes a flat 7% yearly return and a 22% retirement tax rate. Real results, returns, taxes, and contribution limits vary.

3Which should a teen pick?

There's no universal "right" answer, but the common teen playbook is: because your tax rate is low right now, a Roth often wins — you lock in cheap taxes today and let decades of tax-free growth do the heavy lifting. To open either one while you're a minor, you'll usually need a parent to set up a custodial version, and you need earned income to contribute.

Common places to open a (custodial) IRA: Charles Schwab, Fidelity, Robinhood, and SoFi — examples to explore, not recommendations. Check each one's current terms, and set it up with a parent while you're a minor.

Big takeaway: Roth = pay tax now, withdraw tax-free later; Traditional = tax break now, taxed later. Same investments inside — you're just choosing when the tax bill lands.

Next → Lesson 9: 401(k)

← Lesson 7: Bonds Next → Lesson 9: 401(k)

Not financial advice. This is educational content only — nothing here is a recommendation to buy or sell any specific investment. Investing involves risk, including possibly losing money, and PACT isn’t a financial advisor. If you’re under 18, open any real account together with a parent or guardian.