Traditional or Roth IRA, Which Retirement Fund is Right for You?

January 19, 2012 | By Steven DiGregorio

Do you need to plan more for your retirement?  These days who doesn’t?

You may want to consider opening an individual retirement account to complement any workplace savings plan for which you might be eligible.  IRAs provide the potential for tax adantaged, compound growth of your retirement savings.  One key consideration in establishing a new IRA though is to decide whether a traditional IRA or Roth IRA makes the most sense for you. Contrasting the immediate and long term benefits of each will follow:

Rules that Apply to both Traditional or Roth IRA

  • Income Limits – To qualify for IRA contributions in 2011, your income must not exceed $169,000 (phaseout from $169,000 – $179,000) for married couples filing jointly and $107,000 (phaseout from $107,000 – $122,000) for single filers.
  • Contribution Limits – Both types of IRA have the same maximum annual contribution limits: $5,000 for tax year 2011, plus an additional $1,000 “catch-up” contribution for those 50 and older in that year.
  • Timeline for Contributions – Contributions to either IRA  for 2011 can be made until 4/15/2012.  Note that Roth IRA accounts must be opened by 12/31/2011.

Traditional IRA 

With a Traditional IRA your contributions are tax-deductible, provided you don’t participate in a retirement plan at work.  If you and/or your spouse contribute to a workplace plan, you may still be able to make tax-deductible contributions if your income falls below certain limits.  Here your investments will grow tax-deferred until you withdraw money in retirement.  Any withdrawals are then taxed as ordinary income.  The IRS requires that you begin taking minimum withdrawals by age 70 ½.

In essence, a traditional IRA provides a modest tax break now and the promise of tax-deferred, compound growth into the future.

Roth IRA

With a Roth IRA, your contributions are made with after-tax dollars and investment growth is not taxed at all!  You can begin to make withdrawals without tax or penalty as long as the account has been in existence for more than five years and you are older than age 59 ½.  So while a Roth IRA provides no immediate tax break, it does offer the tremendous benefits of both compounding and tax-free growth!  A Roth also provides significantly more flexibility than a traditional IRA.  Since your Roth contributions are made with after-tax money, you can withdraw them at any time!  Additionally, unlike a traditional IRA a Roth IRA does not require minimum withdrawals after age 70 1/2.  As a result, your funds potentially can grow tax-free indefinitely—providing income in later retirement or becoming part of your estate.

The Bottom Line

If you are eligible for either a Roth or a tax-deductible traditional IRA, you must decide whether getting a tax deduction now is more important than not having to pay tax on withdrawals.

Younger investors in particular may benefit greatly from the Roth’s tax free growth. Other investors may find the ability to deduct their contributions now more compelling—for example, if they are in a high tax bracket today, and expect to be in a low bracket during retirement.

Regardless of which type of IRA you select, the tax-sheltered growth of an IRA can be a powerful ally in funding your retirement expenses.  Most importantly, the key to a successful retirement is making contributions to a qualified retirement plan both early and consistently.  No matter what market or economic environment we are experiencing, it’s important to stay focused on your long-term goals.  Contributing to your own personal IRA is a great way to do that.

The information herein contained does not constitute tax advice.  Any decisions or actions based on tax related information contained herein should not be made without first consulting a CPA or Accountant.

For more information contact Compass Asset Management Group, LLC  at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Tags: 401(k), 403(b), 457, distribution, investing, investment advisors, investment strategies, IRA, retirement, retirement income, retirement plan, Retirement Planning, ROTH, Taxes

STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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