Traditional vs. Roth IRA

June 12, 11:41 AMJacksonville Retirement Planning ExaminerBryan Dudones

Previous Next

Comment Print Email RSS Subscribe

Subscribe

Get alerts when there is a new article from the Jacksonville Retirement Planning Examiner. Read Examiner.com's terms of use.

Email Address   Include other special offers from Examiner.com Terms of Use

Traditional IRA

The traditional IRA is a special type of personal savings plan that provides certain tax advantages to encourage you to save money for retirement. For 2009, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a traditional IRA. You may also be able to contribute up to the same amounts to a traditional IRA for your spouse. Assets in a traditional IRA grow tax-deferred until they are paid out to you.

Deductible and nondeductible contributions

There are two types of contributions that you can make to a traditional IRA: deductible contributions and nondeductible contributions. When you make deductible contributions, you reduce your taxable income for the year, so the money that you contribute is pre-tax. Those dollars will not be taxed until you withdraw them from the IRA. When you make nondeductible contributions, you contribute after-tax dollars that will not be taxed when you withdraw them from the IRA. However, the portion of any withdrawal that represents investment earnings is always taxed.

Your ability to make deductible contributions to a traditional IRA depends on your annual income, your income tax filing status, and whether you (or your spouse) are covered by an employer-sponsored retirement plan. There are no income limitations when making nondeductible contributions.

Roth IRA

The Roth IRA is a product of the Taxpayer Relief Act of 1997. Just like a traditional IRA, assets held within a Roth IRA enjoy tax-deferred growth. But the Roth IRA is often described as the opposite of a traditional IRA because of some key differences. Roth IRA contributions are never tax deductible (you can only contribute after-tax dollars), but withdrawals may be completely tax free. For 2009, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a Roth IRA. You may also be able to contribute up to the same amounts to a Roth IRA for your spouse.

You may or may not qualify to establish a Roth IRA. If you do qualify, you may not be able to contribute the full annual maximum amount. Whether or not you can contribute to a Roth IRA depends on your annual income and your income tax filing status.

Nothing in this article should be construed as specific investment advice. For investment and tax concerns specific to your needs, please request a personal consultation from your Advisor.