Traditional and Roth IRAs - Which Is Right For You?

There is a wide variety of tax-advantaged ways for individuals to save for retirement. Because of their income tax benefits and because IRAs are so easily established, they have become one of the most often used retirement savings vehicles available today. Recent tax laws, however, have created three very unique types of IRAs the Traditional IRA, the Non-Deductible IRA and the newer Roth IRA.

Traditional IRA

Traditional IRA - Individual Retirement Account, is a tax-deferred investment and savings account that acts as a personal retirement fund for people with employment income. The maximum contribution is $5,500 annually in 2013 and 2014 with an additional $1000 if over 50 years old. There are two primary types of IRAs: Regular and Spousal. Regular IRAs are designed for individuals with earned income, while Spousal IRAs are designed for married couples in which only one of the spouses has earned income. You have the option of investing in a wide variety of investments. (See IRS Publication 590).

For Regular and Spousal IRAs:
Your contribution is fully tax-deductible if:

• Neither you nor your spouse participated in a company-sponsored retirement plan.
• You contributed to a company-sponsored retirement plan: are single and earned less than $59,000 in 2013 or married and filing jointly and had a joint income of less than $95,000 in 2013.

Your contribution is partially tax-deductible if:

• You contributed to a company-sponsored retirement plan: are single and earned $59,000 but less than $69,000 in 2013 or married and filing jointly and had a joint income of $95,000-$115,000 in 2013.

Your contribution is not tax-deductible if:

• You contributed to a company-sponsored retirement plan: either single and earned more than $69,000 in 2013 or married and filing jointly and had a joint income of more than $115,000 in 2013.

Non-Deductible IRA

Similar to the Traditional IRA, the Non-Deductible IRA allows a working individual under the age of 70 ½ to contribute up to $5,000 of compensation each year. Unlike the Traditional IRA, the Non-Deductible IRA contribution is made with after-tax dollars, the income tax deduction allowed with the Traditional IRA is not available to the Non-Deductible IRA. For the most part, the Non-Deductible IRA is utilized by those who do not qualify for the Traditional IRA, but can benefit from the “tax deferral” of earnings allowed with the Non-Deductible IRA.

Roth IRA

Roth IRA - is an individual retirement account with a maximum contribution of:

• In 2013 and 2014 the maximum contribution is $5,500 with additional $1,000 contribution if over age 50.
• Contributions to a Roth IRA are not tax-deductible. However, the investments grow tax free and earnings may be withdrawn tax free after 59 ½ as long as the account has been open 5 years.
• Eligibility for contributions to a Roth IRA is phased out for married couples filing jointly with an AGI between $178,000 and $188,000 for 2013 and single individuals with an AGI between $112,000 and 127,000 in 2013.
• See IRS Publication 590

To Help Decide Which IRA Is Best For You...

Many factors must be considered, such as current and future income tax rates, investment returns, what the money will be used for and when, income, marital status, and the availability of a retirement plan at work. We can assist you in examining your personal situation to help you tailor your retirement plan to your individual needs.