Roth IRA and Traditional IRA Basics

[jeffrey]

When it comes to saving for your retirement, Individual Retirement Accounts (IRAs) are a wonderful tool. This is because not only are your saving money, you get added tax benefits for saving through them. This is especially true for individuals who don't have access to an employer 401k plan.

Comparing different IRA options can be a bit confusing for those just beginning to consider them, but taking a little time to research will show you the differences. There are two main types of IRA accounts. Both effectively save you money, but defer the taxes you pay in different ways.

Deductible (Traditional) IRA: If you're under the age 70 1/2 with earned income, you're can make a contribution to a Traditional IRA.

The Traditional IRA allows save up to $3,000 in pre-tax dollars ($3,500 if you are 50+ years old) -- this means that you are able to reduce your taxable earned income by the amount you contribute to the IRA each year. All earnings grow without paying taxes, but earnings and deductible contributions will be taxed as ordinary income when you begin withdrawing money from the account. You're not allowed to withdraw the money without penalties before age 59 1/2.

Roth IRA: The Roth IRA allows you to save up to $3,000 in after-tax dollars ($3,500 if you are 50+ years old) -- this means that you don't get a tax deduction the year your contribute, but all the earnings grow tax-free and there are no taxes to pay when you withdraw the money. The money must stay in the Roth IRA for at least five years and can begin being withdrawn after age 59 1/2.




IRAs are great tools for helping you attain the income you want for your retirement and you can't go wrong choosing either of these. For those who are strapped for money, the Traditional IRA gives you an immediate tax reduction while those who don't need a tax reduction immediately can let their money grow and cash out tax free with the Roth IRA.

For more information, see the IRS Publication 590, Individual Retirement Accounts.

[jIM_Ohio]

There are several factors to add into this. Withdraw rules are probably where most of the confusion can be turned into fact and control the decision.

Traditional IRA and 401k will have withdraws taxed (at whatever your current tax bracket is the year of the withdraw). At age 70 1/2 federal law requires you take a "required minimum distribution: (RMD). The government will tell you what the RMD is... you are allowed to take more out, the purpose of the RMD is to make sure the government gets to tax that money sooner or later. Some 401k plans may let you NOT withdraw if you are still working at 70 1/2, But if you are retired, you will have an RMD at 70 1/2 and every year after. If you are working, but have an Traditional IRA, and are 70 1/2, you will have an RMD.

Roth IRA withdraw rules are much more flexible. You have already paid taxes going in, so the government is not as controlling as to when you start taking money out, or how much you take out. There are NOT RMD's for a Roth IRA.

Based on the lax withdraw rules of the Roth, I suggest at least some retirement assets in a Roth account to take advantage of the lack of RMDs and un regulated withdraws.