Financial Focus: Should You Choose Roth or Traditional IRA?

Financial Focus
Should You Choose Roth or Traditional IRA?

An IRA is certainly a great way to save money for retirement. But which IRA is right for you - "traditional" or Roth? As is often the case in the investment world, there's no one "right answer" for everyone - but the more you know before making a choice, the better off you'll be.
To begin with, you'll find two important differences between the IRAs. First, a traditional IRA has the potential to grow tax deferred, while a Roth IRA's earnings have the potential to grow completely tax free, provided you've had your account for at least five years and you don't begin taking withdrawals until you're 59-1/2. And second, contributions to a traditional IRA may be tax deductible (depending on your income and whether you or your spouse have access to an employer-sponsored retirement plan), while Roth IRA contributions are never deductible.
On the other hand, the traditional and Roth IRAs share some things in common. Both have the same contribution limits ($4,000 in 2007, or $5,000 in 2007 if you're 50 or older) and both can be funded annually with virtually any type of investment - stocks, bonds, Certificates of Deposit, etc.
So, given both the differences and the similarities, which IRA should you choose? Actually, you might not even have a choice. If you're single, and your adjusted gross income is more than $110,000, you cannot contribute to a Roth IRA; if you're married and filing jointly, the limit is $160,000.
However, assuming your income level does permits you to choose between the two IRAs, you'll need to ask a key question: Does the potential tax deduction offered by a traditional IRA outweigh the advantage of the Roth IRA's tax-free earnings? As a (very) general rule, you might say that if you can make deductible contributions and you are going to be in a lower tax bracket upon retirement - and that's far from a certainty- then you might come out ahead by selecting the traditional IRA. However, even this assumption requires some complex number-crunching, so, before you made any decisions, consult with your tax professional.
Apart from this comparison, what other factors could help you choose between a Roth or traditional IRA? Consider the following:
* Your estimated retirement age - If you have a traditional IRA, you must start taking withdrawals when you reach 70 - 1/2. But if you own a Roth IRA, you are never required to take withdrawals. So, if you are still working at 70 - 1/2, and you own a traditional IRA, you'll have to take withdrawals, and pay taxes on them, while simultaneously paying income taxes on the compensation from your job.
* Your need for retirement income - If you think you will be able to preserve a good chunk of your IRA, then you might find it advantageous to own a Roth IRA, which can continue potentially growing, tax-free, until your death, when it will pass on to your heirs. Of course, you can also leave a traditional IRA in your estate, but, since you'll be forced to start taking withdrawals at 70-1/2, you might have significantly less to pass on than you would with a Roth IRA.
Clearly, there's a lot to consider when choosing between a traditional IRA and a Roth IRA. See your tax advisor for help in making the right choice - but don't wait too long to put an IRA to work for you.

This article was submitted by local financial representatives of Edward Jones.