If you already contribute to an IRA, then you’re taking an
important step toward building the financial resources for
retirement. If you don’t have an IRA, then you might want to
consider opening one. But which one?
If you already contribute to an IRA, then you’re taking an important step toward building the financial resources for retirement. If you don’t have an IRA, then you might want to consider opening one. But which one?
Your two main choices are a “traditional” IRA and a Roth IRA. These IRAs share some common characteristics. First, you can fund either one with virtually any type of investment you choose – stocks, bonds, CDs, etc. Second, you can contribute up to $3,000 per year to either IRA, or $3,500 if you’re 50 or over. (However, you cannot contribute to a Roth IRA if your modified adjusted gross income exceeds $160,000 if you’re married and file jointly, or $110,000 if you’re single.)
Beyond these similarities, there are some important differences in the two IRAs. Here’s a quick look at each:
Traditional IRA – Your traditional IRA contributions may be tax deductible, depending on your annual income and whether you’re covered under an employer-sponsored retirement plan. And your earnings grow tax-deferred until you start taking withdrawals.
Roth IRA – You fund a Roth IRA with after-tax dollars, so you always have tax- and penalty-free access to your contributions. And your earnings grow totally tax-free, provided you don’t start taking withdrawals until you’re 59 1/2 and you’ve had your account for at least five years. Also, you can typically make tax-free withdrawals for first-time homebuyer expenses. (If you withdraw money from a traditional or Roth IRA before you’re 59 1/2, you may have to pay a 10-percent penalty.)
So which IRA is right for you? There are no easy answers. If you’re not eligible to deduct your contributions to a traditional IRA and you are eligible to contribute to a Roth IRA, then you may want to choose the Roth IRA.
But what if you’re eligible to contribute to a Roth IRA and you could still deduct your contributions to a traditional IRA? On one hand, the traditional IRA offers a powerful combination: tax deductibility and tax-deferred growth. On the other hand, a Roth IRA is one of the few investments that offers tax-free earnings.
Obviously, it’s a tough choice. And that’s why you may want to consider some other criteria. For example, if you have a traditional IRA, you must start taking minimum distributions by the time you’re 70 1/2. With a Roth, you never have to take them – you can leave the entire value of your IRA to your beneficiaries, and they won’t have to pay taxes on withdrawals. Consequently, your projected need for retirement income and your desire to leave money to your family are two factors you’ll want to consider when choosing between a Roth and a traditional IRA.
Unfortunately, you can’t contribute the maximum amount to both types of IRAs. Whatever amount you contribute to one will reduce what you can contribute to another.
A qualified financial professional or your tax adviser may be able to help you determine which type of IRA is right for you. But even with this assistance, make sure you understand all the issues involved.
Financial Focus is provided by Mark Vivian, a representative of Edward Jones Financial Services. His office is at 615 San Benito St., suite 105. Phone 634-0694.
