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Focus: Roth vs. traditional IRA -- which is right for you? |
If you already contribute to an IRA, then you’re taking an important step
toward building the financial resources you need 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. And 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, though, 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
employee-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 and a half
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 and a half, you may have to pay a 10 percent
penalty.
So, which IRA is right for you? As is often the case in the investment world,
there are no quick and 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 and a half. 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 have it both ways — that is, 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. Remember, this money is for your retirement
— so you’ll want to make the right moves.
Financial Focus, a service of financial services organization
Edward Jones, is provided to The Newberg Graphic by Newberg Edward Jones representative
Doug Cornick. |
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From Jan. 29,
2003, Newberg Graphic
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