Traditional IRA vs. Roth IRA
November 3rd, 2007By: Stephen Bishop Jr.
I am sure most of you have either heard about or contribute to a Traditional IRA. However, there are some people that are not aware of the Roth IRA and its advantages. Some simple comparisons can help you decide which is right for you.
Traditional IRA:
The major advantage of the Traditional IRA is that your contributions are tax-deductible. Whether or not your contributions are tax-deductible depends on income level. The biggest downside to contributing to a Traditional IRA is the mandatory withdrawals at age 70.5. While contributions may be tax-deductible, distributions for a Traditional IRA are considered to be a part of your income and therefore taxed. In 2007, a person of the age of 50 can contribute up to $5000. A person of the age of 49 or younger can contribute up to $4000.
Roth IRA:
The Roth IRA is unlike most of the other IRAs. Roth IRA contributions are made with after-tax dollars. Therefore, Roth IRA contributions are not tax-deductible like the Traditional IRA. The major advantage of the Roth IRA is that your earnings are completely tax-free after the age of 59.5. Also, the contributions made can be withdrawn at any time without incurring any early withdrawal fees. It is extremely important to not withdrawal your earnings too soon. Remember that earnings are only tax-free after the age of 59.5. Certain situations are under exception, such as first time home buyers. First time home buyers can make early withdrawals from their Roth IRA without penalty to help finance their home. The Roth IRA has the same contribution limits as the Traditional IRA for 2007.
If you assume that you will be in a higher tax bracket after you retire, right now would be a great time to begin contributing to a Roth IRA. Of course, all of the earnings from it will be totally tax-free! Also, you always have the option of converting your Traditional IRA to a Roth IRA. To do this you must pay taxes on the converted amount. Choosing one or the other can be difficult. Take your time. Speak to someone that knows about your options and go from there.
