Understanding IRA’s

Roth vs Traditional 

What these two types if IRA accounts have in common is the fact that they are both vehicles to help provide for your long-term financial security.  But there are some important differences.

The main difference between the two accounts is pretty straightforward.  What’s complex is determining which account is right for you.  Determining which type of IRA account is right for you depends largely on your current tax rates when contributing, and the tax rates you expect to face in retirement when you receive distributions. 

 

Traditional IRA

Contributions to a traditional IRA are generally tax-deferred if you don’t participate in an employer-sponsored retirement plan. But, you will have to pay tax on the distribution. If you are currently in a high tax bracket, and expect to be in a lower tax bracket at retirement, the tax deferral feature of a traditional IRA is attractive. 

Distributions from a traditional IRA taken after age 59 ½ are taxed as ordinary income. Distributions taken before 59 ½ are generally also assessed a 10 percent early withdrawal penalty.  You must begin taking minimum required distributions by April 1 of the year after the year in which you reach age 70 ½.

 

Roth

Contributions to a Roth are never tax-deductible; they come from after-tax money.  But the good news is, you don’t pay tax on the distribution, which could be several times the amount contributed.  If you expect your tax bracket to be higher in retirement than it is today, then the Roth is more attractive.

You never have to take distributions from your Roth. But you can begin taking them tax-free and penalty-free at age 59 ½ as long as the account have been open for five years.

In 2007, eligible individuals may contribute up to $4000 to a traditional or Roth IRA ($5000 for those aged 50 and over)

 

 

This information is provided as a very basic explanation of the differences between traditional and Roth IRAs.  For detailed information about these personal retirement savings programs, consult your financial professional.