Choices
Individual Retirement Accounts (IRA)
For individuals who qualify, another smart way to build a retirement nest egg is to take advantage of the tax-deferred growth offered by an Individual Retirement Account (IRA). An IRA is a personal retirement savings plan, which may be set up with banks, mutual fund companies, brokerage firms, or similar investment organizations. You can have an IRA in addition to an employer retirement plan.
The maximum you can contribute to an IRA in 2008 is $5000. In addition, people age 50 and over can contribute an additional $1,000
You can choose from a Traditional IRA or Roth IRA (as well as a Roth (401(k)). Traditional or Roth IRA can be obtained through a bank/credit union or broker.
Traditional IRA
The Traditional IRA is available to everyone; there are no income restrictions.
Contributions to a Traditional IRA may be tax-deductible. Being able to take a tax deduction for a contribution depends on several factors, namely your modified adjusted gross income (MAGI), your tax-filing status and your participant status (i.e. whether or not you are considered an active participant in another plan). In other words if you make too much money and are already benefitting from tax deductions, then your ability to get the tax benefit for an IRA contribution may be limited.
Regular IRAs grow tax-deferred, and both the original investment and the growth will be taxed when the money is withdrawn. You don’t pay taxes on the money earned in the IRA until you withdraw the money.
Money cannot be withdrawn until age 59 ½ without a penalty. Penalty-free withdrawals of up to $10,000 can be made from any IRA for first-time homebuyers who meet certain qualifications. Withdrawals also can be made for qualified higher education expenses incurred on behalf of the taxpayer, the taxpayer’s spouse, or any of their children or grandchildren. These education withdrawal provisions include expenses related to undergraduate or graduate-level college courses.
Mandatory distributions for traditional IRAs must begin no later than April 1 of the year following the year the IRA owner reaches age 70 1/2.
Roth IRA
A Roth IRA differs from traditional IRAs in that contributions are not deductible. It is available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
Roth IRA’s are funded with “post-tax” dollars. In other words, you pay your federal income taxes on earnings, then contribute to your Roth IRA. You then will be able to withdraw funds tax-free. These contributions are not tax deductible either.
Roth IRAs, with a few exceptions, grow income-tax free and owners are not required to begin taking minimum distributions at age 70½. Your Roth IRA can continue to grow tax-free for as long as you own it.
So, how do the Roth and Traditional IRA’s compare?
Find out with this calculator »