Traditional IRAs versus Roth IRAs

Here is another option in the retirement savings game: the IRA or individual retirement account. This is another tax-deferred growth option with investing choices similar to 401K plans - mutual funds, stocks, bonds, etc.

It is an excellent option if your current employer doesn't offer a 401K or 403B plan or if you have determined that those plans aren't going to meet your retirement needs. IRAs can be set up with a local bank, online bank, and mutual fund or brokerage firm.

Typically, your maximum contribution is $2000 or 100% of your income per year, whichever is less. The contribution may be made with pretax income in certain situations, check with your banking institution. As with the 401K, the penalty is 10% and any taxes owed for early withdrawals before age 59-1/2. However, penalties are waived if you are purchasing your first home or financing higher education as well as death, disability and certain medical expenses.

The basic rule for deducting traditional IRA contributions is this: the higher the income, the less deductible your contribution becomes. If you're single with no employer plan, it's all deductible. If you're single with an employer plan, it's all deductible if you make under $30,000 per year, then it's prorated until $40,000, and not deductible over $40,000. If you're married and filing a joint tax return with no employer plan, then it's deductible up to $150,000, prorated up to $160,000, and not deductible over $160,000. If you're married and filing a joint tax return with an employer plan, then it's completely deductible under $50,000, prorated up to $60,000, and not deductible over $60,000. And don't forget: the maximum annual contribution for a couple is $4,000 or 100% of your income, whichever is less, so non-earning spouses can contribute as well.

The traditional IRA must all be withdrawn by age 70-1/2; either in a lump sum payment or in smaller payments spread out over the period between age 59-1/2 and age 70-1/2. This differs from the Roth IRA in that Roth IRA earnings do not have to be withdrawn and can be turned over to your heirs.

The Roth IRA is funded after taxes. Therefore, any withdrawals after age 59-1/2, if the account has been held for at least 5 years, are tax-free. If the withdrawals are tax-free, then so are the earnings!

The maximum contribution is the same with a cap of $2,000 or 100% of your income, whichever is less. This is allowed even with participation in other retirement plans. However, your income must be under $110,000 if you are single and under $160,000 if you're married. And you can use both traditional and Roth IRAs at once, but your total contributions can't exceed $2,000 annually.

It is recommended that if you are in a low income tax bracket and young, you should go with the Roth IRA and fully fund it. However, if you are simply in a low-income bracket, stick with a traditional IRA. So, figure out where you are and start saving for those blissful years called retirement!

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