There is
a wide variety of tax-advantaged ways for individuals to save for retirement.
Because of their income tax benefits and because IRAs are so easily established,
they have become one of the most often used retirement savings vehicles
available today. Recent tax laws, however, have created three very unique types
of IRAs – the Traditional IRA, the Non-Deductible IRA and the newer Roth IRA.
Traditional IRA
Traditional IRAs allow a working individual under the age of 70 ½ to contribute
up to $4,000 of compensation this year, tax-deferred, for retirement and other
important financial goals. In addition, taxpayers age 50 and older are now
allowed to contribute an additional $500 as part of the "catch-up" provisions of
the new tax law. Earnings on these contributions grow tax-deferred until
withdrawn. Married couples who file jointly may contribute up to $8,000 ($4,000
per IRA), even if only one spouse has earned income, certain limitations apply.
Your IRA contributions may also be deductible depending on your participation in
an employer maintained retirement plan, your adjusted gross income, and your
filing status. Withdrawals are subject to ordinary income tax and may be subject
to a 10% federal penalty if taken prior to age 59 ½.
Non-Deductible IRA
Similar
to the Traditional IRA, the Non-Deductible IRA allows a working individual under
the age of 70 ½ to contribute up to $4,000 of compensation each year. Unlike the
Traditional IRA, the Non-Deductible IRA contribution is made with “after-tax”
dollars – the income tax deduction allowed the Traditional IRA is not available
to the Non-Deductible IRA. For the most part, the Non-Deductible IRA is utilized
by those who do not qualify for the Traditional IRA, but can benefit from the
“tax deferral” of earnings allowed with the Non-Deductible IRA.
Roth IRA
The Roth
IRA is available as an alternative to the traditional IRA. If you have earned
income you may be eligible to make non-deductible contributions of up to $4,000
a year to the Roth IRA, even after age 70 ½. This $4,000 (plus potential
"catch-up" contributions) is the maximum annual combined contribution that can
be made to both types of IRA's (traditional and Roth), not counting rollover
contributions. Funds, including earnings, can potentially be withdrawn from a
Roth IRA federal tax-free. Withdrawals are generally federally income tax-free
if the distribution is taken five years after the first contribution and after
you have reached age 59 ½. Please consult your tax advisor for additional ways
to qualify for tax-free treatment of Roth distributions. Withdrawals of earnings
prior to age 59 ½ may be subject to income tax and a 10% federal penalty.
To Help Decide Which IRA Is Best For You...
Many
factors must be considered, such as current and future income tax rates,
investment returns, what the money will be used for and when, income, marital
status, and the availability of a retirement plan at work. We can assist you in
examining your personal situation to help you tailor your retirement plan to
your individual needs.
Material discussed is meant for general illustration and/or informational
purposes only and it is not to be construed as tax, legal, or investment
advice. Although the information has been gathered from sources believed to be
reliable, please note that individual situations can vary therefore, the
information should be relied upon when coordinated with individual professional
advice.
Traditional or Roth IRA, Whish is Best for You?
