February 24, 2010

IRAs Traditional vs. ROTH

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Categories: Retirement, Financial Planning, Tax Planning

What type of IRA is best for you? The answer like many other tax and financial questions is not always so cut and dry. It depends on a lot of variables including your financial needs and objectives, your timeline for the IRA, and your current and future tax bracket. Some of these variables we know, your objectives and your current tax bracket, others are unknown like your retirement income needs and future tax situation. Below is a brief description of both types of IRAs.

Traditional IRA:

• Tax-deductible contributions (If you do not participate in a retirement plan, if you are single and your AGI is less then $65,000*, if you are married and your AGI is less then $109,000* or you are married and one spouse is not covered by a retirement plan and your AGI is less then $176,000*)
• Withdrawals can begin at age 59 1/2 and are mandatory at 70 1/2.
• Taxes are paid when money is withdrawn from the IRA
• Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
• After tax contributions (non-deductible) are available to everyone; no income restrictions
• All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception)

ROTH IRA:

• Contributions are made with after tax dollars (not tax deductible)
• No mandatory withdrawals for your entire life
• All withdrawals after age 59 1/2 and after having the ROTH IRA account for 5 years are 100% tax free
• Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
• Contributions allowed only for single filers with AGI up to $120,000* or married couples with a combined AGI of $176,000* annually.
• Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

The main differences between the two IRAs are that a Traditional IRA can be contributed on a tax-deductible basis and the withdrawals are mandatory and taxable. ROTH IRAs are contributed to on an after tax basis, there are no mandatory withdrawals, and the withdrawals are tax free. In conclusion, it is probably best to have some money in a Traditional IRA and some in a ROTH IRA. This allows you to have more options when taking withdrawals as well as hedge your accounts against future tax rates. For more information on choosing the appropriate IRA for you, please contact us.

As always you can reach me at .(JavaScript must be enabled to view this email address) with any questions you have.

*All AGI limits are for tax year 2009