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Roth or IRA: Which One is The Best for You This Year?

Which is the better for you - Roth or Traditional IRA for the 2011 tax year?

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.

  • Tax-Deferred Growth: Your contribution grows tax deferred
     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.

  • 10 Percent Penalty: The 10 percent penalty is used to encourage IRA owners to keep their money in their IRA until reaching age 59 ½. If you withdraw any of your money prior to age 59 ½, then you will incur a 10 percent penalty on your withdrawal amount. There are some exceptions to the rule: educational expenses, first time home purchase and certain medical
    expenses.
  • 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.

  • Disqualified Distributions: The earnings in your Roth must remain in the account for 5 years (known as the 5 year clock) and until you reach 59½ years old. A 10 percent penalty will be applied on earning distributions that do not meet these requirements.

  • 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.

    This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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