🏖️ Retirement & Free Money · Lesson 2 of 10 · 8 min

Roth vs Traditional

🌱 You can pay tax on a $5 bag of seeds, or on the entire orchard it grows into. People agonize over this choice for hours — it's genuinely not that hard, and getting it right is worth more than most raises.

💡 Key idea

Traditional = tax break now, taxed later. Roth = taxed now, tax-free later (growth included).

🧠 Why it matters

Both are retirement accounts; the only difference is WHEN you pay taxes. TRADITIONAL: you contribute pre-tax money now (lowering today's tax bill) and pay taxes when you withdraw in retirement. ROTH: you contribute money you've already been taxed on, and every qualified withdrawal in retirement (after 59½, with the account open at least 5 years) — including all the growth — is 100% tax-free.

🌍 In the real world

🌳 Picture a tax on a tree. Traditional taxes the whole grown tree (the harvest). Roth taxes only the tiny seed (your contribution) and never touches the tree it becomes. If you're young with decades of growth ahead, that tax-free harvest is enormous.

📌 Takeaways

Traditional: pre-tax now, taxed in retirement
Roth: after-tax now, tax-free in retirement
Young + decades of growth often favors Roth

📖 Terms in this lesson

Roth: Pay tax on the money now, and every withdrawal in retirement is tax-free.

Traditional (pre-tax): Skip tax on the money now, and pay tax when you withdraw it in retirement.

Required minimum distribution (RMD): The amount you must withdraw from pre-tax retirement accounts each year once you reach your 70s.

✅ Test yourself

With a ROTH account, when do you pay taxes on it?

Now — and qualified withdrawals are tax-free
Only in retirement
Never, on anything
Both now and again later

Answer: A · Now — and qualified withdrawals are tax-free

You're taxed on the money going in; qualified withdrawals, including all growth, come out tax-free.

In the 'seed vs harvest' analogy, Roth taxes...

The big grown tree
Just the tiny seed
Both
Neither

Answer: B · Just the tiny seed

Roth taxes the small contribution now, so the much larger amount it grows into is tax-free.

Why might a 25-year-old lean Roth?

It's the only choice
Decades of growth will all come out tax-free
It has no contribution limit
It avoids the market

Answer: B · Decades of growth will all come out tax-free

With many years of compounding ahead, locking in tax-free growth is hugely valuable.

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