An Individual Retirement Account (IRA) is a great retirement savings tool for most
individuals. Created by the federal government, IRAs can be funded during your
working years. During retirement, IRAs may help supplement your Social Security benefits. Your retirement savings can begin with your annual IRA contribution.
If you are under age 50, the current maximum annual contribution amount is $5,000. For those 50 years and older, an additional $1,000 can be contributed. If turning 50 this year, you are now eligible to contribute $6,000. The contribution amounts are adjusted for inflation each year by the federal government.
IRAs come in two types: Traditional and Roth. To determine which one is best suited for your annual contribution, here are some key factors to consider:
Advantages to a Traditional Deductible IRA:
- Tax Deductible: Your contribution is deductible on your federal
income tax return for the year in which you contribute.
until you withdraw the money. This means you do not pay any taxes while
your money is growing.
Limitations to a Traditional Deductible IRA:
- Adjusted Gross Income (AGI) Limitations: The amount you can deduct is limited based on your AGI and if you participate in your employer sponsored
retirement plans. Your contribution may be fully deducted on your income
taxes, partially deducted or not deductible at all.
Advantages to a Roth IRA:
- Avoid Taxes in the Future: Roth IRAs grow tax free. Therefore no taxes are due when you withdraw your money.
- No Required Minimum Distributions (RMD): Roth IRAs do not require RMDs after age 70 ½, so your money can continue to grow with the potential for larger dollar amounts to leave to heirs.
Limitations to a Roth IRA:
- Adjusted Gross Income (AGI) Limitations: For high wage earners (2011 limits
for single filing over $122,000 and married filing jointly over $179,000),
Roth contributions are not allowed.
Always consult a financial planner or IRS publication 590 before you make your final IRA decision. Making the correct IRA choice now can benefit you down the road in your retirement.