Financial Focus Roth vs. Traditional IRA: Which is Right for You?

If you already contribute to an IRA, youíre taking an important step toward building the financial resources you need for retirement. If you donít have an IRA, you might want to consider opening one. But which one?

Your two main choices are a ďtraditionalĒ IRA and a Roth IRA.

These IRAs share some common characteristics. First, you can fund either one with virtually any type of investment - stocks, bonds, CDs, etc. And second, you can contribute up to $3,000 per year to either IRA, or $3,500 if youíre 50 or over. (However, you cannot contribute to a Roth IRA if your modified adjusted gross income exceeds $160,000, if youíre married and file jointly, or $110,000, if youíre single.)

Beyond these similarities, though, there are some important differences in the two IRAs. Hereís a quick look at each:

* Traditional IRA - Your traditional IRA contributions may be tax-deductible, depending on your annual income and whether youíre 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. Your earnings grow totally tax-free, provided you donít start taking withdrawals until youíve reached age 59-1/2 and youíve held your account for at least five years. Also, you can typically make tax-free withdrawals for first-time homebuyer expenses.

Keep in mind that if you withdraw money from a traditional or Roth IRA before youíre 59-1/2, 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 youíre not eligible to deduct your contributions to a traditional IRA but can contribute to a Roth IRA, you may want to choose the Roth.

But what if youíre 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: pre-tax contributions, 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, itís a tough choice. And thatís 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 youíre 70-1/2. With a Roth, you never have to take them - you can leave the entire value of your IRA to your beneficiaries, and they wonít 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 youíll want to consider when choosing between a Roth and a traditional IRA.

Unfortunately, you canít have it both ways - that is, you canít contribute the maximum amount to both types of IRAs. Whatever amount you contribute to one will reduce what you can contribute to the other.

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 youíll want to make the right moves.

This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, 301-733-9465; Dave Walker, 301-766-7300; Joan Bowers, 240-420-8514; and John R. Pullaro, 301-824-7726.